Team 8HW_2

docx

School

Arizona State University *

*We aren’t endorsed by this school

Course

MISC

Subject

Economics

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by PresidentAardvark2617

Group Homework Assignment #2 Leila Bandringa Branden Garbin Brad Johnson Shana Lear Janna Rowell Part I: Chapter 11, Question 8: How did the credit crunch become a global financial crisis? The inability for borrowers to easily obtain credit, also known as the ‘credit crunch,’ began in 2007. Three factors contributed to the crunch:  The liberalization of banking and securities regulation,  A global savings glut and  The low interest rate environment created by the Federal Reserve As the credit crunch worsened, many collateralized debt obligations (CDOs: a corporate entity constructed to hold a portfolio of fixed-income assets as collateral) found themselves stuck in various tranches of mortgage-backed securities (MBS) debt which they had not yet placed or were unable to place as countrywide foreclosure rates escalated. Commercial and investment banks were forced to write down billions of subprime debt. As the U.S. economy slipped into recession, banks also started to set aside billions for credit card debt and other consumer loans they feared would go bad. Credit rating firms lowered their ratings on many CDOs after realizing the models they used to evaluate the risk of the various tranches were mis-specified. Additionally, the credit rating firms downgraded many MBS, especially those containing subprime mortgages, as foreclosures around the country increased. An unsustainable problem arose for bond insurers who sold credit default swap (CDS) contracts and the banks that purchased this credit insurance. As bond insurers were hit with claims from bank-sponsored structured investment vehicles (SIVs: a virtual bank, frequently operated by a commercial bank or investment bank, but which operates off the balance sheet) as the MBS debt in their portfolios defaulted, downgrades of the bond insurers by the credit agencies required the insurers to put up more collateral with the counterparties who had purchased the CDSs. This put stress on their capital base and prompted additional credit rating downgrades, which in turn triggered more margin calls. By September 2008, a worldwide flight to quality investments – primarily short-term U.S. Treasury Securities – ensued. In October 2008, the spread between the three-month Eurodollar

rate and the three-month U.S. Treasury bill, frequently used as a measure of credit risk, reached a record level of 543 basis points. The demand for safety was so great, that in November 2008, the one-month U.S. Treasury bill was yielding just one basis point. Investors were essentially willing to accept zero return for a safe place to put their funds. Detroit Motors Mini Case It is September 1990 and Detroit Motors of Detroit, Michigan, is considering establishing an assembly plant in Latin America for a new utility vehicle it has just designed. The cost of the capital expenditures has been estimated at $65,000,000. There is not much of a sales market in Latin America, and virtually all output would be exported to the United States for sale. Nevertheless, an assembly plant in Latin America is attractive for at least two reasons. First, labor costs are expected to be half what Detroit Motors would have to pay in the United States to union workers. Since the assembly plant will be a new facility for a newly designed vehicle, Detroit Motors does not expect any hassle from its U.S. union in establishing the plant in Latin America. Secondly, the chief financial officer (CFO) of Detroit Motors believes that a debt-for-equity swap can be arranged with at least one of the Latin American countries that have not been able to meet its debt service on its sovereign debt with some of the major U.S. banks. The September 10, 1990, issue of Barron’s indicated the following prices (cents on the dollar) on Latin American bank debt: Brazil 21.75 Mexico 43.12 Argentina 14.25 Venezuela 46.25 Chile 70.25 The CFO is not comfortable with the level of political risk in Brazil and Argentina, and has decided to eliminate them from consideration. After some preliminary discussions with the central banks of Mexico, Venezuela, and Chile, the CFO has learned that all three countries would be interested in hearing a detailed presentation about the type of facility Detroit Motors would construct, how long it would take, the number of locals that would be employed, and the number of units that would be manufactured per year. Since it is time consuming to prepare and make these presentations, the CFO would like to approach the most attractive candidate first. He has learned that the central bank of Mexico will redeem its debt at 80 percent of face value in a debt-for-equity swap, Venezuela at 75 percent, and Chile 100 percent. As a first step, the CFO decides an analysis based purely on financial considerations is necessary to determine which country looks like the most viable candidate. You are asked to assist in the analysis. What do you advise? No matter where Detroit Motors builds its new facility, the company will still need $65,000,000 in that country’s currency to build the plant. The company must complete an analysis –

comparing the dollar cost of the less-developed country’s debt from a creditor bank to provide $65,000,000 in local currency upon redemption with the country’s central bank. To build in Mexico: $65,000,000/.80 = $81,250,000 Detroit Motors must purchase $81,250,000 in Mexican sovereign debt to have $65,000,000 in pesos after redeeming it from the Mexican central bank. $81,250,000 x .4312 = $35,035,000 The cost in dollars will be $35,035,000. To build in Venezuela: $65,000,000/.75 = $86,666,667 Detroit Motors must purchase $86,666,667 in Venezuelan sovereign debt to have $65,000,000 in bolivars after redeeming it from the Venezuelan central bank. $86,666,667 x .4625 = $40,083,333 The cost in dollars will be $40,083,333 To build in Chile: $65,000,000/1.00 = $65,000,000 Detroit Motors must purchase $65,000,000 in Chilean sovereign debt to have $65,000,000 in pesos after redeeming it with the Chilean central bank. $65,000,000 x .7025 = $45,662,500 The cost in dollars will be $45,662,500. Considering the above numbers, Detroit Motors should build its facility in Mexico, as the cost in dollars is the lowest. Chapter 12, Question 1: Describe the differences between foreign bonds and Eurobonds. Also discuss why Eurobonds make up the lion’s share of the international bond market. The international bond market is made up of two basic market segments: foreign bonds and Eurobonds. A foreign bond issue is offered by a foreign borrower to investors in a national capital market and denominated in that nation’s currency. A Eurobond issue is denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. Roughly 80% of new international bonds are likely to be Eurobonds. Eurobonds are known by the currency in which they are denominated – for example, U.S. dollar Eurobonds, yen Eurobonds, etc. Foreign bonds frequently have fun names that designate the country in which they are issued – like Yankee bonds – dollar-denominated foreign bonds originally sold to U.S. investors. Bringing a Eurodollar bond issue to market requires a shorter length of time, which is part of why the Eurobond segment of the international bond market is roughly four times the size of

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

the foreign bond segment. Also, borrowers pay a lower rate of interest for Eurodollar bond financing in comparison to Yankee bond financing. Eurobonds also do not have to meet national security regulations. Chapter 12, Question 4: What factors does S&P Global Ratings analyze in determining the credit rating it assigns to a sovereign government? In rating a sovereign government, S&P’s analysis centers around five factors: institutional assessment, economic assessment, external assessment, fiscal assessment and monetary assessment. The institutional assessment comprises an analysis of how a government’s institutions and policymaking affect a sovereign’s credit fundamentals by delivering sustainable public finances, promoting balanced economic growth and responding to economic or political shocks. The key drivers of a sovereign’s economic assessment are income levels, growth prospects and economic diversity and volatility. The external assessment reflects a country’s ability to obtain funds from abroad to meet its public and private sector obligations to non-residents. The external assessment refers to the transactions and positions of all residents, vis-a-vis those of non-residents, because it is the totality of these flows and stocks that affects a country’s level of reserves and exchange rate developments. The fiscal assessment reflects the sustainability of a sovereign’s deficits and debt burden. A sovereign’s monetary assessment reflects the extent to which its monetary authority can fulfill its mandate while supporting sustainable economic growth and decreasing major economic or financial shocks. Chapter 13, Question 2: As an investor, what factors would you consider before investing in the emerging stock market of a developing country? As an investor, one should consider market capitalization and market liquidity. A liquid stock market is one in which investors can buy and sell stocks quickly at close to the current quoted prices. A measure of liquidity is the turnover ratio. The turnover ratio is the ratio of stock market transactions over a period of time divided by the size (or market capitalization) of the stock market. The higher the turnover ratio, the more liquid the secondary stock market – indicating ease in trading. The company's culture, corporate governance structure, and protections for investors are a few other considerations. An investor should also consider market consideration, if it is high then the diversification is limited creating more risk while low concentration would allow for more portfolio diversity.

Chapter 13, Question 6: Why do you think empirical studies about factors affecting equity returns basically showed that domestic factors were more important than international factors, and, secondly, the industrial membership of a firm was of little importance in forecasting the international correlation structure of a set of international stocks? Domestic factors, like economic conditions, vary between countries – which in turn leads to different monetary and fiscal policies. Economic conditions impact the way stocks are traded in one country, whereas stocks traded elsewhere will behave differently. The way businesses operate in a country is influenced by the government’s economic rules. Even if companies are in the same type of business and from different countries, they won’t necessarily act the same everywhere. When these companies sell securities, we should not expect them to perform identically either. Chapter 15, Question 1: What factors are responsible for the recent surge in international portfolio investment? The rapid growth in international portfolio investments reflects the globalization of financial markets. Many governments began to deregulate foreign exchange and capital markets in the late 1970s. In addition, recent advancements in telecommunication and computer technologies contributed to the globalization of investments by facilitating cross-border transactions and rapid dissemination of information across national borders. Chapter 15, Question 3: Explain the concept of the world beta of a security. The world beta measures the sensitivity of a national market to world market movements. World beta measures the risk of a stock in relation to the global market. A higher world beta means the security is riskier, and vice versa. The world beta is defined as Bi = σiw / σw 2 , where σiw is the covariance between returns to the ith market and the world market index, and σw 2 is the variance of the world market return. Chapter 15, Problem 1: Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 per share; the exchange rate was $1.15 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euros at the exchange rate of $1.06 per euro. First, determine the profit from this investment in euro terms. Second, compute the rate of return on your investment in euro terms. How much of the return is due to the exchange rate movement? ((135-120)/120) + ((1/1.06)-(1/1.15)/(1/1.15)) (15/120) + (.94340-.86957/.86957) .12500 + (.07383/.86957) .12500+.08490 .2099 x 100 = 20.99 --> 21% rate of return in euro terms

.08490 x 100 = 8.5% is due to the exchange rate movement Chapter 15, Problem 5: At the start of 1996, the annual interest rate was 6 percent in the United States and 2.8 percent in Japan. The exchange rate was 95 yen per dollar at the time. Mr. Jorus, who is the manager of a Bermuda-based hedge fund, thought that the substantial interest advantage associated with investing in the United States relative to investing in Japan was not likely to be offset by the decline of the dollar against the yen. He thus concluded that it might be a good idea to borrow in Japan and invest in the United States. At the start of 1996, in fact, he borrowed Y1,000 million for one year and invested in the United States. At the end of 1996, the exchange rate became 105 yen per dollar. How much profit did Mr. Jorus make in dollar terms? Step 1: Compute maturity value of the U.S. investment (Y1,000,000,000/95)*(1.06) = $11,157,894.74 Step 2: $$ amount needed to pay off Y loan (Y1,000,000,000)*(1.028)/105 = $9,790,476.19 Step 3: Find $$ profit 11,157,894.74-9,790,476.19 = $1,367,418.55 Chapter 15, Problem 8: The HFS Trustees have solicited input from three consultants concerning the risks and rewards of an allocation to international equities. Two of them strongly favor such action, while the third consultant commented as follows: “The risk reduction benefits of international investing have been significantly overstated. Recent studies relating to the cross-country correlation structure of equity returns during different market phases cast serious doubt on the ability of international investing to reduce risk, especially in situations when risk reduction is needed the most.” a. Describe the behavior of cross-country equity return correlations to which the consultant is referring. Explain how that behavior may diminish the ability of international investing to reduce risk in the short run. Assume the consultant’s assertion is correct. Cross-country correlations tend to increase during turbulent market conditions, diminishing the short-term benefits of international diversification. If one market is performing poorly the others are likely to as well. b. Explain why it might still be more efficient on a risk/reward basis to invest internationally rather than only domestically in the long run.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

If the investor must liquidate investments in the turbulent phase, they can ride out the turbulence and reap the long-term benefits of international investments. The HFS Trustees have decided to invest in non-U.S. equity markets and have hired Jacob Hind, a specialist manager, to implement this decision. He has recommended that an unhedged equities position be taken in Japan, providing the following comment and the table data to support his views: “Appreciation of a foreign currency increases the returns to a U.S. dollar investor. Since appreciation of the Yen from 100\/$U.S. to 98\/$U.S. is expected, the Japanese stock position should not be hedged.” Market Rates and Hind’s Expectations U.S. Japan Spot rate (yen per $U.S.) n/a 100 Hind’s 12-month currency forecast (yen per $U.S.) n/a 98 1-year Eurocurrency rate (% per annum) 6.00 0.80 Hind’s 1-year inflation forecast (% per annum) 3.00 0.50 Assume that the investment horizon is one year and that there are no costs associated with currency hedging. c. State and justify whether Hind’s recommendation (not to hedge) should be followed. Show any calculations. F = 100 * (1 + 0.06) / (1 + 0.008) = 105.16 Yen/$ The Yen is expected to depreciate not appreciate like Hind predicts, therefore the recommendation to not hedge the investment may not be the best strategy. Chapter 16, Question 16: What factors would you consider in evaluating the political risk associated with making FDI in a foreign country?  The host country’s political and government system o If a country has too many changes in its government system, policies may become inconsistent, creating political risk.  Track records of political parties and their relative strength o These items would reveal a great deal about how they would run the economy. If a party has a strong nationalistic ideology and/or socialist beliefs, it may implement policies that are detrimental to foreign interests. In contrast, a party that subscribes to a liberal and market-oriented ideology is not very likely to take actions to damage the interest of foreign concerns.  Integration into the world system o If a country is politically and economically isolated from the rest of the world, it would be less likely to observe the rules of the game. North Korea, Iraq, Libya

and Cuba are examples. Countries that are members of the EU, OECD and WTO are more likely to abide by the rules, reducing political risk.  The host country’s ethnic and religious stability o Through the civil war in Bosnia, we’ve seen that domestic peace can be shattered by ethnic and religious conflicts, causing political risk for foreign business.  Regional security o Real and potential aggression from neighboring countries can lead to political risk.  Key economic indicators o Political events are often triggered by economic situations. The two are not entirely independent of each other. For example, persistent trade deficits may induce a host country’s government to delay or stop interest payments to foreign lenders, erect trade barriers or suspend the convertibility of the local currency, causing major difficulties for multinational corporations. Enron vs. Bombay Politicians Mini Case On August 3, 1995, the Maharashtra state government of India, dominated by the nationalist, right-wing Bharatiya Janata Party (BJP), abruptly canceled Enron’s $2.9 billion power project in Dabhol, located south of Bombay, the industrial heartland of India. This came as a huge blow to Rebecca P. Mark, the chairman and chief executive of Enron’s international power unit, who spearheaded the Houston-based energy giant’s international investment drive. Upon the news release, Enron’s share price fell immediately by about 10 percent to $33.50. Mark sprang to action to resuscitate the deal with the Maharashtra state, promising concessions. This effort, however, was met with scorn from BJP politicians. Enron’s Dabhol debacle cast a serious doubt on the company’s aggressive global expansion strategy, involving some $10 billion in projects in power plants and pipelines spanning across Asia, South America, and the Middle East. Enron became involved in the project in 1992 when the new reformist government of the Congress Party (I), led by Prime Minister Narasimha Rao, was keen on attracting foreign investment in infrastructure. After meeting with the Indian government officials visiting Houston in May, Enron dispatched executives to India to hammer out a “memorandum of understanding” in just ten days to build a massive 2,015-megawatt Dabhol power complex. New Delhi placed the project on a fast track and awarded it to Enron without competitive bidding. Subsequently, the Maharashtra State Electricity Board (MSEB) agreed to buy 90 percent of the power Dabhol produces. Two other U.S. companies, General Electric (GE) and Bechtel Group, agreed to join Enron as partners for the Dabhol project. In the process of structuring the deal, Enron made a profound political miscalculation: It did not seriously take into consideration a rising backlash against foreign investments by an opposition coalition led by the BJP. During the state election campaign in early 1995, the BJP called for a reevaluation of the Enron project. Jay Dubashi, the BJP’s economic advisor, said that the BJP would review all foreign investments already in India, and “If it turns out that we have to ask them to go, then we’ll ask them to go.” Instead of waiting for the election results, Enron rushed to close the deal and began construction, apparently believing that a new government would find it difficult to unwind the deal when construction was already under way. Enron was not very concerned with local political

sentiments. Enron fought to keep the contract details confidential, but a successful lawsuit by a Bombay consumer group forced the company to reveal the details: Enron would receive 7.4 cents per kilowatt-hour from MSEB and Enron’s rate of return would be 23 percent, far higher than 16 percent over the capital cost that the Indian government guaranteed to others. Critics cited the disclosure as proof that Enron had exaggerated project costs to begin with and that the deal might have involved corruption. The BJP won the 1995 election in Maharashtra state and fulfilled its promise. Manohar Joshi, the newly elected chief minister of Maharashtra, who campaigned on a pledge to “drive Enron into the sea,” promptly canceled the project, citing inflated project costs and too-high electricity rates. This pledge played well with Indian voters, many of whom had a visceral distrust of foreign companies since the British colonial era. (It helps to recall that India was first colonized by a foreign company, the British East India Company.) By the time the project was canceled, Enron already had invested some $300 million. Officials of the Congress Party who championed the Dabhol project in the first place did not come to the rescue of the project. The BJP criticized the Congress Party, rightly or wrongly, for being too corrupt to reform the economy and too cozy with business interests. In an effort to pressure Maharashtra to reverse its decision, Enron “pushed like hell” the U.S. Energy Department to make a statement in June 1995 to the effect that canceling the Enron deal could adversely affect other power projects. The statement only compounded the situation. The BJP politicians immediately criticized the statement as an attempt by Washington to bully India. After months of nasty exchanges and lawsuits, Enron and Maharashtra negotiators agreed to revive the Dabhol project. The new deal required that Enron cut the project’s cost from $2.9 billion to $2.5 billion, lower the proposed electricity rates, and make a state-owned utility a 30 percent partner in the project. A satisfied Joshi, the chief minister, stated: “Maharashtra has gained tremendously by this decision.” Enron needed to make a major concession to demonstrate that its global power projects were still on track. The new deal led Enron to withdraw a lawsuit seeking $500 million in damages from Maharashtra for the cancellation of the Dabhol project. Discussion Points 1. Discuss the chief mistakes that Enron made in India. There were a handful of mistakes made by Enron in the case above, however, one of the chief mistakes Enron made in India was not fully understanding where political views lay before making investments. With sufficient research, Enron would have quickly discovered where the current attitudes aligned at the time pertaining to foreign investments. At the time, there was not an appetite for these foreign companies to invest in India; others would have seen moving forward as a significant risk. Additionally, Enron did not ever consider the possibility of BJP winning the election and what that outcome would do to their financial stance. A thorough assessment of potential opportunities and risks would have served immense value in this situation. Finally, acting in secrecy or not being transparent with transactions/communication led to distrust among leaders and the public. The way Enron operated was very closed off and confidential which came off in an ill-natured manner. 2. Discuss what Enron might have done differently to avoid its predicament in India.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

For Enron to avoid its predicament in India, a handful of other steps or strategies should have been taken before any decisions were made. For example, running opportunities and risk assessments for potential investments. This would then lead to also examining political cases where new parties could be taking power and how those transitions would affect Enron’s business plans. Doing their due diligence in reviewing the current and future state of India’s political environment would have helped Enron prevent poor decision-making. Another avenue would have been to work with local businesses to help gain confidence and sponsorship within the political groups. While there is no guarantee that this would work, it would at least have shown that Enron is willing to work with the community and do business in a way that is respected and welcomed in India. Enron could have internally prioritized an auditing group. Having a team capable of assessing best practices and proper business operations could have helped Enron handle these investments appropriately. Finally, having some form of insurance with their investments. When taking such large financial moves, especially ones as risky as this, developing some sort of insurance to protect your business would have been a good step for Enron. Collectively, these ideas could have helped Enron avoid its predicament in India. Part II Read the following case in your course packet and answer the corresponding questions below. Please limit your total response to no more than 3 pages. Case: Mortgage Securitisation in Hong Kong and Asia Questions: 1. What are the benefits of securitisation? Benefiting from Securitisation is a process that transforms assets like loans into tradable securities, which helps banks to reduce their credit risk exposure. It also eases the cash flow management for banks by creating liquidity in the market. By converting loans into securities, securitisation creates liquidity in the market, making it easier for banks to manage their cash flow and balance sheets. It helps banks meet regulatory requirements more efficiently and supports the development of local debt and secondary mortgage markets. Additionally, banks can maintain customer relationships even after the securitisation of loans, offering opportunities for cross-selling and deepening client engagement. Finally, joining a structured securitisation program can be quicker and less costly for banks compared to issuing MBS independently. This leads to improved banking and monetary stability and promotes more homeownership in Hong Kong. 2. Discuss the preconditions required for developing an MBS market. Developing a successful Mortgage-Backed Securities (MBS) market depends on several preconditions. These include a robust legal and regulatory framework that supports foreclosure,

property rights, and the securitization process. A strong foreclosure law is particularly essential as it ensures that lenders can recover their investments in case of borrower default. The presence of a liquid market with a diverse and sophisticated investor base is crucial for the development of an MBS market. A lack of liquidity and the absence of large, active foreign investors can be significant barriers to the growth of ABS markets. Sufficient demand from investors is required for securitization to flourish, which in turn requires an active domestic bond market. Government initiatives can be pivotal in establishing and nurturing an MBS market. Through capital injection and regulatory support, government involvement can help overcome initial market resistance and build confidence among participants. Clear and favorable tax policies are essential to make securitization transactions economically viable and attractive to issuers and investors. A good example is Malaysia's efforts to clarify the taxation framework for special-purpose vehicles (SPVs) and remove certain taxes on ABS-related transactions. Product innovation and market infrastructure development are also vital. For example, the Hong Kong Mortgage Corporation Limited (HKMC) has developed innovative mortgage products and debt issuance programs to provide stability and attractiveness to the MBS market. Each market has its unique challenges that need to be addressed. Singapore's high home ownership rate, low mortgage default rate, and large domestic investor base are strong foundations for an MBS market. However, the intertwined nature of the government's role as developer, lender, and pension-fund manager poses significant challenges that must be addressed. 3. Was the HKMC’s venture into MBS products a timely one? The Hong Kong Mortgage Corporation (HKMC) made a timely and strategic move by venturing into MBS products. This was a well-considered response to the challenges and opportunities of the Hong Kong financial landscape in the late 1990s and early 2000s. Before the establishment of HKMC in March 1997, individual institutions' efforts to securitize mortgages in Hong Kong had not been successful due to the lack of conformity of the underlying pool of mortgages and the heterogeneity of issues. These efforts, which began as early as 1988, generated little liquidity as MBS were not listed on the Stock Exchange, indicating a fragmented market that struggled to attract investors. The Hong Kong government established HKMC a few months before the Asian financial crisis, with an initial capital injection to facilitate the development of local debt and secondary mortgage markets. This move was proactive considering the impending financial turmoil that would further emphasize the need for such an institution to provide stability and support to the mortgage and broader financial markets.

By the end of June 1999, the number of banks involved with HKMC had increased to 40, with significant mortgage purchases indicating strong operational execution. HKMC's approach to purchasing conforming mortgages based on predetermined criteria allowed for efficient and flexible mortgage purchasing processes, enhancing its role in the market. The launch of the Hong Kong Dollar Note Issuance Program (NIP) and the Debt Issuance Program (DIP) in 1998 targeted financial institutions and institutional investors, respectively, and was met with significant success. This demonstrated HKMC's ability to attract investment and enhance liquidity in the market, further validating the timeliness and strategic importance of its establishment and operations. The inaugural issues of MBS in 1999, amounting to HK$1.63 billion, marked a significant milestone in HKMC's efforts to develop the MBS market in Hong Kong. The back-to-back sale structure to banks and the subsequent listing of NIP notes on the Stock Exchange were crucial steps toward creating a liquid market for MBS. The establishment of HKMC and subsequent initiatives directly responded to the broader need for a more liquid debt market in Asia, highlighted by the Asian financial crisis. The crisis underscored the critical role of an active debt market in providing a stable funding base for banks and addressing the prevalent asset-liability mismatches at the time. HKMC's plans to launch a new multi-currency MBS program and its efforts to list MBS locally and overseas indicated a forward-looking strategy to expand the investor base and further develop Hong Kong's financial markets. To summarize, HKMC's venture into MBS products was not only timely, given the financial and market conditions of the late 1990s and early 2000s, but also strategic in addressing the long- term needs of Hong Kong's financial markets. Through its innovative approaches and successful execution of various programs, HKMC played a pivotal role in developing the local MBS market, enhancing liquidity, and contributing to the stability and growth of Hong Kong's financial sector. Part III: Read the following case in your course packet and answer the corresponding questions below. Please limit your total response to no more than 3 pages. Case: Huaneng Power International Inc.: Raising Capital in Global Markets Questions: 1. What are the benefits to a non-U.S. firm from listing on a U.S. exchange?

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

The benefits to a non-U.S. firm listing on U.S. exchanges are the capital is lower, better name recognition, more funds for the potential for an increase in value. The foreign firm can diversify and reach out to new investors in the U.S. exchange. Only investing in the domestic market keeps them from raising additional capital in a larger market with more investors. Investors have more trust in U.S. exchanges, so the outcome is expected to be positive when foreign firms list on a U.S. exchange. The U.S. exchanges are some of the most liquid in the world which allows for the foreign firm to have a lower cost of capital which allows them to raise funds at a lower cost. Of course, the U.S. is always under the spotlight so there is more up-to-date investor information constantly. Listing on U.S. exchanges can boost the foreign firm’s investor confidence in corporate governance due to the regulatory compliance requirements. When an investor feels more secure with the market, they are likely to spend more money investing in that market. 2. Will foreign investors be interested in investing in this company? Despite the disappointing experience Shandong experienced at the NYSE, HPI was justified in feeling optimistic that there would be foreign interest in HPI. One of the key reasons foreign investors would have intrigue in HPI is due to their controlling shareholder, Huaneng Power International Development Corporation (HPIDC). HPIDC worked closely with the Ministry of Electrical Power to develop power plants in fast-growing provinces to close the gap between the Chinese economy and power output. HPIDC was mandated to provide a set amount of additional power output for the PRC. HPI benefits from having HPIDC as a controlling shareholder with the type of a guaranteed work relationship with the PRC. Although Shandong has a similar relationship with HPIDC, HPI differs from Shandong by having more advanced equipment and technology and serving more areas. Electrical companies in PRC used domestic equipment and technology. HPI used international equipment and technology that increased reliability by 40% compared to an average PRC power plant while also increasing output quantity. HPI will also attract foreign investors with its impressive and reliable historic performance. In the past, HPI has had a continuous profitable operating history. There are no indications that would suggest HPI won’t continue this successful performance. HPI has made it clear to investors their reason for raising funds in the first place which is to expand their number of power plants. It is noteworthy then to evaluate how much success HPI has had in building power plants in the past. All previous plants developed were completed on time and budget. This exceptional feat paired with their operational success should encourage investors. Another reason U.S.-specific investors would have interest in HPI is due to the current U.S. utilities landscape. Utilities in the U.S. have been deregulated, lowering electric company profits and performance. Electrical utilities in the PRC are regulated, making competition between electrical providers non-existent. HPI can provide investors with a guaranteed return, so if investors want to swap their domestic utilities holdings for a more stable option, then HPI is the answer.

Team 8HW_2

Related Documents