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Chapter 18: Q.18 (page 414)

Suppose that a foreign resident is contemplating buying 5 per cent of the shares of a company based in a developing nation but is experiencing difficulty determining whether the firm is riskier than others in that country. What type of investment is this foreign resident considering, and what type of asymmetric information problem is he or she experiencing?

Short Answer

Expert verified

On account of this financial backer mulling over the acquisition of 5 percent offers in the unfamiliar organization as Foreign Portfolio Investment (FPI), failure to get adequate data on country risk influences his venture choice.

Step by step solution

01

Given Information

A foreign resident has purchased 5percentof the portions of an organization in an emerging country and is a detached financial backer who has contributed with a theoretical intention.

02

Explanation

His goal is to bring in speedy profit from his cash and make a drawn-out revenue source, realizing that the creating economy would have bullish stock examples. Emerging nations with pacing industrialization and higher paces of financial development have a more worthwhile venture environment however inserted with less secure business sectors. Useful data on the political turns of events, likely busts and blasts and monetary essentials are quintessential for sane venture choices through FPI.

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Most popular questions from this chapter

Identify which of the following situations currently faced by the World Bank or the International Monetary Fund are examples of adverse selection and which are examples of moral hazard.

a. The World Bank has extended loans to the government of a developing country to finance construction of a canal with a certain future flow of earnings. Now, however, the government has decided to redirect those funds to build a casino that may or may not generate sufficient profits to allow the government to repay the loan.

b. The IMF is considering extending loans to several nations that failed to fully repay loans they received from the IMF during the past decade but now claim to be better credit risks. Now the IMF is not sure in advance which of these nations are unlikely to fully repay new loans.

c. The IMF recently extended a loan to a government directed by democratically elected officials that would permit the nation to adjust to an abrupt reduction in private flows of funds from abroad. A coup has just occurred, however, in response to newly discovered corruption within the government's elected leadership. The new military dictator has announced tentative plans to disburse some of the funds in equal shares to all citizens.

In principle, how could a nation maintain a relatively high rate of economic growth even if it also has a relatively high rate of population growth?

Consider Table 18-1. Based on the basic arithmetic of economic growth, what were the average annual rates of real GDP growth since 1990 for those nations experiencing positive rates of annual growth of per capita real GDP?

Suppose that a foreign resident has bought 20 percent of the shares of a company based in a developing nation but is experiencing difficulty determining whether the firm has responded to this purchase by engaging in risker behaviour. What type of investment has this foreign resident undertaken, and what type of asymmetric information problem is she or he experiencing?

Identify the key functions of the World Bank and the International Monetary Fund.
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