Money as a means of exchange has been in existence for thousands of years. Since kingdoms and nations issue their own money, and the rate of one nation's currency can be measured in another's, the concept of trading in currency, rather than the goods that currency can purchase, arose centuries ago. Astute traders could buy currency in one nation and sell it in another for a profit. With the telecommunications revolution that has taken place in this century, this type of trade has given rise to an entirely new type of transaction, which some observers liken more to gambling than to strict financial trading. These new traders use computers to conduct business without regard to time zones, and great sums can be made--and lost--in the space of a few seconds. This research explores a hypothetical international investment portfolio, and considers its performance over six weeks in late 1995; all financial information is taken from the Financial Times.
Background of International Investing
International investment takes two forms: portfolio investment, and direct investment (Lawrence 2A). Portfolio investment occurs when the purchaser is interested only in the return on the instruments themselves, not necessarily on the welfare of the stocks or bonds in question. Direct investment is when an investor participates in the management of the company issuing the stocks or bonds. Currency transactions are by their very nature portfolio investments since foreign investors are typically unable to intercede on the running of a government, while stock and bond investments can be examples of direct investment. Mutual funds can be either, depending on the level of knowledge the investor has about the components of the fund. Commodities trading is also an example of portfolio investment since commodities traders are often not interested in actually taking delivery of the goods in question.
The foreign currency chosen for this portfolio ...