Strategic Financial Management

5 Boster plc is a multinational company that has investments in several developing countries. It is considering
investments in three more developing countries, Ammobia, Flassia and Hracland. All three countries have a history
of political instability, but Boster believes that the potential returns from the investments might justify the political risk.
A consultancy report has produced the following assessments of the countries.
Expected investment return (%) Political Risk (%)
Ammobia 21 33
Flassia 18 29
Hracland 28 42
Political risk was measured by investigating key variables in the relevant countries. These were: corruption, changes
in government, social conditions, cultural issues, unfair trade and asset security.
Boster will invest in a maximum of two of the countries, with an equal amount invested in each country. The countries
are in diverse parts of the world, and the returns from the investments in the three countries are believed to be
independent.
Required:
(a) Calculate the risk, return and coefficient of variation of the possible investment combinations. (6 marks)
(b) Discuss how useful the information calculated in (a) above might be to Boster in making its investment
decisions. (5 marks)
(c) Briefly discuss other ways by which Boster might attempt to measure the potential political risk of the
investments. (4 marks)
(15 marks)
6 Discuss the possible foreign exchange risk and economic implications of each of the following types of exchange
rate system for multinational companies with subsidiaries located in countries with these systems:
(a) a managed floating exchange rate;
(b) a fixed exchange rate linked to a basket of currencies; and
(c) a fixed exchange rate backed by a currency board system.
8
(15 marks)