EECS 3101 Lecture Notes - Lecture 14: Brazilian Real, United States Dollar
28 Jun 2018
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EECS 3101 Lecture 14 Notes
Introduction
Exchange Rate Risk
In contrast, investors in an emerging country that has a high risk-free rate would be
unwilling to accept such a low return.
If they can earn a high return by investing in a risk-free asset, they would require a still
higher return to invest in risky assets such as stocks.
The exposure of investors to exchange rate risk from investing in foreign stocks depends
on their home country.
Investors in the United States who invest in a Brazilian stock are highly exposed to
exchange rate risk because the Brazilian currency (the real) has depreciated
substantially against the dollar over time.
However, Brazilian investors are less exposed to exchange rate risk when investing in
U.S. stocks because the U.S. dollar is unlikely to depreciate significantly against the
Brazilian real.
In fact, Brazilian investors normally benefit from investing in U.S. stocks owing to the
dollar’s appreciation against the real.
Indeed, that appreciation is often necessary to generate an adequate return for
Brazilian investors, given their high required return when investing in foreign stocks.
Taxes
The tax effects of dividends and capital gains also vary among countries.
The lower a country’s tax rates, the higher the share of pretax cash flows received that
the investor can retain.
Other things being equal, investors based in low-tax countries should value stocks
higher.
The valuation of stocks by investors within a given country changes in response to
changes in tax laws.
Document Summary
In contrast, investors in an emerging country that has a high risk-free rate would be unwilling to accept such a low return. The tax effects of dividends and capital gains also vary among countries. The valuation of stocks by investors within a given country changes in response to changes in tax laws. Investors in an emerging country that has a high risk-free rate would be unwilling to accept such a low return. If they can earn a high return by investing in a risk-free asset, they would require a still higher return to invest in risky assets such as stocks. The exposure of investors to exchange rate risk from investing in foreign stocks depends on their home country. Investors in the united states who invest in a brazilian stock are highly exposed to exchange rate risk because the brazilian currency (the real) has depreciated substantially against the dollar over time.
