Introduction of Recommending A Short-Term Foreign Investment

        In the modern era of technology and competition, every business unit wants to rule the market with huge capital and high rate of profit. Investment is traditional and method to enhance the capability of a business. Foreign investment is the process of granting your money or capital in the other country to earn more from initial capital. The foreign investment shows that the people from other countries take interest in management of different organization which is beneficial for the investors that they get professional skills from different expertise. Foreign investment leads to the convert in globalization. Globalization refers to the term which is used by multinational companies to invest their money in different countries (Caves, 1971).

        Foreign investment is further divided according to the time as long term and short-term investment. A long-term investment is to invest your money for a long period such as more than 5 years plan. Whereas, a short-term investment is for short period, 1 to 3 years or for months. The short-term investment is most liquid investment and public prefer to invest in short plan because short term plans are more credible (Busse & Hefeker, 2007).

        With an overview of our plan, our company ABC, has a cash reserve of $100,000,000 and we want to invest in short term plan of 6 months. As investment in foreign currency returns at a high rate, so we should invest our money in short term foreign investment. For this purpose, following information should be collected;

  US 6 month interest rate:

In the US economy, LIBOR (London Inter-Bank Offer Rate) is used in terms of investment. Currently LIBOR is paying 2.03750% for 6 month investment. To calculate the 6 month investment in LIBOR is;

= $100,000,000 * 2.03750%

              Return on investment        = $2037500

6 month rate of Canada:

Rate of return varies from country to country. For example we choose Canada as an alternative to America, we can see them;

               Rate in Canada = 1.750%

     Return on investment = $100,000,000 * 1.750%

                                       = $175000

The spot exchange rate of your selected currency relative to the US Dollar

The investment in LIBOR is much greater than Canada as there is much difference in both rates. An investor can get higher return in US dollar as compared to Canada.

 The six-month forward exchange rate per the US Dollar

F is the forward exchange rate

S is the current spot exchange rate

i_d is the interest rate in domestic currency (base currency)

i_f is the interest rate in foreign currency (quoted currency)

Forwarded rate = 0.70549%

As we suppose that we are Canadian base and want to invest in America so the above calculations show forwarded rate of Canada banks.

Proposal:

We suppose that our company is a Canada based company and we want to invest our reserve in US dollar to maximize our return. Investment in foreign country is always given high returns. We calculate the forwarded rate of domestic country to foreign and we concluded that US dollar payout ratio is more than the home base investment.

Recommendations:

·         The company own a huge amount of reserve which can give a high rate of return therefore company should invest money in foreign investment.

·         As some countries offer a trade-off financing method, which is exempt from tax and other duties, therefore investors should be made in these countries.

·         Short term investment should be made more as it is most liquid investment and company can withdraw anytime when more fund is needed (Kogut, 1983).

References Of Recommending A Short-Term Foreign Investment

Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European journal of political economy, , 23 (2), 397-415.

Caves, R. E. (1971). International corporations: The industrial economics of the foreign investment. Economica, , 38 (149), 1-27.

Kogut, B. (1983). Foreign direct investment as a sequential process. . The multinational corporation in the 1980s, 38-56.