CH 10 - 6 Indirect overseas investment

Question 1

6 Indirect overseas investment

1. Ways to Achieve Indirect Overseas Exposure

Answer 1

Investment in multinational companies based in the home market:

Advantages:
* Easy to deal in the familiar domestic market.
* Companies have expertise and operate in the most profitable overseas areas, including those difficult for direct investment.

Disadvantages:
* Domestic earnings dilute overseas exposure.
* No control over where the company conducts its business.
* Example: A US-based investor holding shares in a domestic multinational like Coca-Cola, which earns significant profits overseas.

Investment in collective investment vehicles:
Specialize in overseas investments.
Provide diversified exposure to multiple overseas markets.
Investment in derivatives based on overseas assets:
Includes futures, options, or swaps linked to foreign markets.

Primary Advantage: Avoids many practical problems associated with direct overseas investments.
Suitability:
Small funds benefit most.
Large funds may also use these vehicles for specialist areas outside their expertise.

Question 2

6 Indirect overseas investment

2. Overseas Investment via Domestic Companies with Overseas Exposure

Answer 2

Significance: Many large domestic companies derive a majority of their profits internationally.
Example: Over 75% of profits for the largest 100 UK companies are earned overseas.

Question 3

6 Indirect overseas investment

3. Companies with Overseas Exposure in the Opposite Direction

Answer 3

Type :
Companies relying on imports.
Example: A domestic retailer heavily dependent on imported goods.
Impact of Domestic Currency Weakening:
Imports become more expensive, reducing company profits.
Passing higher costs to customers without losing sales is challenging.