Part 1: Currency Forecasting and Investment Project INTRODUCTION: You work on the currency trading desk of a large international investment bank. Your boss has asked you to forecast what the exchange...

Investment in home country’s securities has limited benefits. The underlying political and
economical factors are associated with a single country and therefore, securities are governed by
a particular set of country specific parameters. In investments are made across the border,
additional diversification benefits are accounted. It has been shown by many of the studies that if
investments are diversified internationally, greater profit can be made (Abid, Leung, Mroua &
Wong, 2014). Most of the investors prefer domestically diversified portfolio with smaller risk
dominant. They argue for better return over risk. On the other hand, a section of investors prefer
internationally diversified portfolio for investment. They believe a cross border investment
would enlarge the diversification and yield the benefit of favorable foreign market without
exposure to a significant risk. It is found that internationally diversified investment is well suited
for high risk exposure. However, with lots of empirical research and finding it has been
concluded that domestically diversified portfolio as well as internationally diversified portfolio
are largely governed by similar underlying factors like economical, political and market related
factors. We can’t emphasize surely on a single argument that one type of investment is better
than other. It is the matter of situation in which investments are made in either domestic or
international or both markets. Investment in politically unstable and vulnerable country may lead
to huge loss while investment in economically strong country like US and Europe may lead to
good profit. Again it is not guaranteed. The positive and negative returns are based on how much
country’s overall condition is favorable and how it will lead in future. Uncertainties are always
there.
Still, preference of international fund is overweighed over domestic funds for large
diversification. It is due to the additional benefits like favorable exchange rate movement,
favorable economical and political condition of foreign country and good future prospects of
two-country relation. Portfolio diversification in foreign securities as well as domestic market
may substantially reduce the risk (Solnik, 1995). To improve the portfolio performance and reap
greater diversification gains, investors should invest in both domestic as well as foreign
country’s securities (Sarkissian, 2004)....