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**FOR THE FINAL PROJECT
**

NAME : MUHAMMAD FAISAL HASSAN

ID : 9185

COURSE : MBA

SUPERVISOR : SIR. ASIF MEHMOOD

TOPIC : Impact Of Ec!a"#$ Rat$ O" R%&'

A"( R$t)*" Of P+*tf+,%+

1. INTRODUCTION

International portfolio diversification has long been recommended as a way of increasing

average returns while reduces the investor’s risk in the internationally diversifying

portfolio. In 1974 the article of Bruno emphasied on the benefit of international portfolio

investment. Institutional investors don’t use international portfolio diversification

fre!uently "#talstedt$ %&&'(.

)he benefit of international diversification is known to all investors. Investors holding

international financial assets face three sources of risk* market risk$ unsystematic risk and

e+change rate risk. ,arket risk is for all investor whether they are local or of foreign

country$ market risk can’t be eliminated through diversification. -nsystematic risk is the

fluctuation in the stock price inde+ that can be diversified because it is uncorrelated with

market risk. .+change rate risk arises because the difference of foreign currencies over a

certain period$ the investor’s return is affected due to currency e+change rate changes.

Investor who diversifies their portfolio eliminates the unsystematic risk. /nce he

achieved full diversification$ the only risk left is the systematic risk. ,arket risk and

e+change rate risk are considered as systematic risks because they cannot be eliminated

through portfolio diversification. 0n investor holding a well diversified national portfolio

is only e+posed to market risk$ while an investor holding a well diversified international

portfolio is e+posed to the market risk as well as the e+change rate risk.

)he ob1ective of this research is to analye the portfolio effect in the volatile e+change

rate. 2or the study$ three investors are selected from -#0$ -3 and 4apan. )his research

covers the calendar year %&&9.

-. BAC./ROUND OF STUD0

5lobaliation has produced a wide range of opportunities for the international investors

in the shape of portfolio diversification and hedging their investment. Investment in

global market has an additional risk of currency fluctuation$ confidence in a foreign

government$ or rules and procedures relating to the possibilities of investment in some

areas. If an investor becomes master to 1udge the possibilities in the diversifying portfolio

internationally$ he or she can have good opportunity for the profitable investment.

International market operate differently than local market$ the low correlation of the

portfolio Beta can produce highest possible return at given level of risk.

1. LITERATURE REVIE2

6arious studies have been made on the effect of e+change rate upon the portfolio risk and

return$ one of such study carried out by pettengill$ sundaran and mathur "1997( 8 they

state that if e+change rate is controlled through techni!ues of hedging with forward

contracts$ it will reduce the portfolio risk$ they concluded that if international stock

market professional and portfolio administrator want to protect their investment up to

some level from volatile e+change rate$ they will have to use hedging techni!ues

"options$ future and forward contracts(. ,any investors consume a lot of resources to

minimie the e+change risk8 it’s a risk that has a direct impact on the international

portfolio investment.

2luctuating e+change rates reduces the return ratio for a diversifiable investment

portfolio$ it tends to make the stock more risky. 2luctuating e+change rate enhances the

risk of foreign investment through its variance and positive covariance$ when we

compare it with the local stock return. 9uring the period of 19:& through 19:7$ about 7&

; fluctuation in -.#. dollar occurs$ which included a number of factors$ one of which

was e+change rate.

#everal researches have considered the impact of e+change rate volatility on the

portfolio returns when we 1udge international portfolio investment in prospective on

e+change rate. If we take the estimated return for a portfolio to be the average of

distribution for all securities possible return contains in the portfolio for a given time

period$ the appro+imated value in the distribution for a return will have a non ero

probability of knowing a return below the market portfolio risk free rate. It’s also

possible with any other portfolio having a market beta greater than ero.

,ost of the previous studies ignored the effect of e+change rate risk upon the

portfolio risk$ when e+change rate behaves as independent variable. In global market that

currency risk has produced many bubbles and bursts. "3ahneman and )versky$ 1979(

#tates that rational investors and the arbitrator are influenced by efficient markets$ in

efficient market investors use to invest their money in the parts$ some in risk free assets

and some in market portfolio.

3. RESEARCH 4UESTION

Investment in international portfolio forces the investors to think about the e+change rate

risk. )he e+pected return of the investment is affected by the variation in e+change rate.

If value of the home currency appreciate against the investing state currency$ investor

return will be increased and vice versa. )he fluctuated e+change rate increases the risk of

international portfolio. <hat is the effect of e+change rate on the portfolio risk and

return$ when the portfolio investment is made in =akistan8 the investors are from 4apan$

-nited 3ingdom and the -#0>

5. PURPOSE OF STUD0

)he aim of this research is to evaluate the influence of e+change rate variability on the

portfolio investment in =akistan. )hree investors from -#$ -3 and 4apan are taken$ and

their investment in portfolio investment is noted. Its monthly return is calculated$ then$

assuming that their investments are in the same portfolio as that of =akistani investor.

)his research has a focus on the three e+change rates$ =3?@-#9$ =3?@5B= and

=3?@A.B. Investor invests in a =akistani portfolio and then converts their return into the

home currency8 while using spot rate at that time. ?eturn is calculated then the research

!uestion is interpreted and the analysis on contribution of e+change rate upon the

portfolio risk and return is carried out.

5. METHODOLO/0

)his section briefly discussed that how the research takes place8 what type of data is used$

which approach is followed$ how data is analyed. Cypotheses are included under

separate heading. 0ssumptions and limitations are given for conducting this study.

'.1 )A=. /2 90)0

)his research is based on secondary data8 it is the historical or past data$ it contains a

period of twelve months. #econdary data is a type of data that is already available for the

research work. <e are using the secondary data of the five listed companies in 3arachi

stock e+change for the year %&&9. Internet is a ma1or source of getting data for the

research activities in modern era. 6arious sources for data collection are used. #econdary

data for this research is received through different sources8 #ome of these sources which I

have used are8 C.D digital library <eb #ites$ /nline media$ research article relevant to

my topic and few investment books studied by me in order to carryout the research

properly. )he study of various 1ournal and research magaines related to my research

topic is also studied and valuable information is e+tracted from these sources.

'.% E-0B)I)0)I6. 90)0

Euantitative data reduces the biasness issue$ in almost all the finance research

!uantitative data is used8 it involves the calculation by using numbers with figures and

formulae. Euantitative data also discusses the aspects of the models. 2or this research the

data is purely !uantitative. Cypotheses are tested and conclusions are derived by using

this type of data. Euantitative type of data maintains some assumptions and limitations

also.

'.F 9.9-D)I6. 0==?/0DC

Euantitative data is applied in deductive approach8 in this approach a general discussion

about the topic is given. Initially the problem is discussed broadly$ and then focus

remains on the problematic issues. It’s also called the funnel approach$ i.e. starting with

general and tends to be more specific at last by discussing the problem area. 0s time

passes$ the more focus relies on the specific research problem. 9eductive approach is a

movement form broader highlighted problem toward more specific. 2or this research

initially e+change rate and the portfolio investments are initially discussed in broader

sense. )hen we narrowly down our focus upon the risk and return of a portfolio while

observing the effect of e+change rate. )he impact of variables upon one another is

analyed by testing the hypothesis.

'.4 #0,=GIB5

2ive sectors are selected out of %: sectors8 from each sector a single firm is selected.

)his selection is based on the best performance on sector basis and the highest

capitaliation with in the same industry. )he selection of five sectors will not affect the

research general acceptability as we have to find the impact of one variable upon the

other. Cere e+change rate is independent variable and portfolio risk H return are

dependent variables.

'.7 CA=/)C.#I#

<e are taking a null hypothesis denoted by Co and its negation C1.

Co I =ortfolio risk H return are affected by the variation in e+change rate

C1 I =ortfolio risk H return are not affected by the variation in e+change rate

'.' ?.#.0?DC E-.#)I/B

<hat is the effect of e+change rate for a portfolio risk and its return$ when the portfolio

investment takes place in =akistan8 the investors are from 4apan$ -nited 3ingdom and the

-#0>

'.7 ?.#.0?DC =?/D.##

3arachi stock e+change is selected for portfolio investment8 this investment is of one

year period. )he selected companies are8 Bank 0lfalah$ #B5=G$ 2au1i fertilier$ Gucky

cement and Bishat te+tile mills from the Banking$ .nergy$ 2ertilier$ Dement and )e+tile

sectors respectively. )his research is of one year time period. Cere we are using the

secondary data and analying the impact of e+change rate upon the portfolio risk and

return. <e will determine the share’s return on monthly basis$ e+pected return on

monthly basis for the stocks of the portfolio. 6ariance is calculated$ and then designed

different weight for the portfolio return. )hen found the portfolio risk and checked that

risk with the ma+imum possible portfolio return. )he option which yields highest

possible return at lower risk will be selected and investment in the portfolio will be made.

)hen optimum portfolio and minimum variance portfolio is calculated.

/ptimum portfolio is the prior choice for the investor of risk taking nature. ,inimum

variance portfolio is the option available for the riskJaverse investor$ because he wants

return at low risk. )hen an allocated amount for the investment will be considered$ three

foreign investors from -.#$ -.3 and 4apan are taken$ they will do the investment in the

same portfolio8 a weighted average of their respective currencies verses =3? "=ak

?upee( is noted for the year %&&9. 0t the end of each month the effect of currency

variation is checked upon the allocated amount for the initial investment. )he gain or loss

will be the research re!uirement for this study.

'.: 90)0 0B0GA#I#

)his research uses a !uantitative data. 0 data of this type is analyed by using

various software$ e.g. #=##$ ,s .+cel$ ,initab etc. 2or this research data is analyed

through ,s .+cel.

'.9 0##-,=)I/B#

• 0ll investors have put their money in portfolio of the risky assets

• #ince portfolio faces two types of risk$ #ystematic and unsystematic risk. )he

investment is made in diversified portfolio of five different sectors$ hence unJ

systematic risk is eliminated. <e are left only with systematic risk8 we assume

there is no systematic risk.

• In 3arachi #tock .+change shares are purchased in lots$ each lot having hundred

shares$ we assume that every lot represents a single stock for the convenience of

our calculation.

'.1& GI,I)0)I/B#

• /ne year data$ because of the time constraint we are using the data for %&&9 only.

• )ime period can affect the statistical result$ but we are analying the calculation

based on one year data.

• ?esearch relies on secondary data$ since this research is analying the affect of

one variable upon the others8 hence we are using the secondary data.

• ?esearch is mostly based on !uantitative data.

'.11 )I,. C/?IK/B

)he duration for this research is one year8 this study is analying the effect of

e+change rate on a portfolio performance its risk and return in %&&9. #o this case

can lack the long term effect of e+change rate on the portfolio performance. )his

one year is a short period of time$ but it will not make the result too much

deviated from the accuracy8 as this research is analying the influence of

e+change rate on portfolio presentation.

6. DISCUSSION

0lthough a lot of research has been done on portfolio risk and return around the world

but very little research has been done in =akistan on this topic. Gooking at the current

economic situation of =akistan$ it is worthwhile to do a research on portfolio risk and

return against the volatile e+change rate of =akistani rupee because =akistani rupee is

fre!uently depreciating because of I,2 conditions put on =akistan against the loan

granted. )his uncertain e+change rate of repee results in increased risk and decreased

returns for firms in =akistan. #o i am going to address this area for 7 sample firms. .ach

firm is selected from a single separate industry. )he selection is based on best

performance and highest capitaliation with in the same industry.

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