Hedging Currency Risks at Aifs Case Questions

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Session 4 CASE Questions

Innocents Abroad: Currencies and International Stock Returns

The goal of this case is to help Sandra Meyer develop a presentation to address Henry Bosse’s concerns about international investments. The general idea is to demonstrate to Henry the benefits of international diversification, if any. To achieve this goal, you need to have a view on 1) the impact of foreign exchange (FX) rates on the return and risk of international investments, and 2) the impact of having more assets on the return and risk of the investment portfolio To form views on these two points, answer the following questions: I. The impact of FX rates on the risk and return of foreign investments 1a) Using data in Appendix A, calculate the
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2e. For N=1, 2, 3, and 8, calculate the “Sharpe Ratio” as expected return/risk. This is a measure of risk-reward tradeoff. 2f. How do the mean, volatility, and Sharpe Ratio change as more assets are added into the portfolio? What do you conclude?


With 8 assets, the number of equal-weighted (EW) portfolios with N=2 is 8*7/2=28. The number of EW portfolios with N=3 is 56, and the number of EW portfolios with N=4 is 70.

Globalizing the Cost of Capital at AES 1) How would you evaluate the capital budgeting method used historically by AES? What's good and bad about it? 2) If Venerus implements the suggested methodology, what would be the range of discount rates that AES would use around the world? 3) Does this make sense as a way to do capital budgeting? 4) How does the adjusted cost of capital for the Pakistan project reflect the probabilities of real events? What does the discount rate adjustment imply about expectations for the project because it is located in PAkistan and not in the US?

Bidding on the Yell Group Case Questions: 1) Is Yell a good leveraged buyout candidate? 2) How similar are the UK and US businesses? Do the management projections in Ex. 6 and Ex. 7 make sense to you? If you were part of the Apax/Hicks Muse team, would you trust them? 3) How does Yell's projected debt affect its valuation? 4) How does the cross-border nature of the Yell deal affect the valuation of the firm? 5) How much is Yell worth? How much


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