3.
Direct purchase
of foreign shares. Here you buy the shares in the country where the firm is listed. This
requires payment in the foreign currency and transferring the certificates to your own
country.
4.
Purchase of international mutual funds. Numerous investment companies invest in
stocks outside the U.S. The alternatives range from global funds, which invest in both
U.S. stocks and foreign stocks, to international funds, which invest almost wholly
outside the U.S. Mutual funds are a convenient method of global investing,
particularly for small investors.
c: Discuss the characteristics of derivative investments (e.g. options, futures).
Warrants are options issued by a firm, giving the holder the right to acquire the firm’s
common stock from the firm at a specified price within a designated time period.
Call options are similar to warrants. A call is the option to buy the common stock of a firm
within a given time period at a specified price (called the striking price). A call option differs
from a warrant, because it is not issued by the firm but by another investor who is willing to
assume the other side of the transaction. Options are also typically valid for a shorter time
period than warrants.
Put options are the right to sell a given stock during a given time period at a specified price.
Puts are used by investors who expect a stock price to decline during the specified period or
by investors who own the stock and want protection from a price decline.
Futures contracts are contracts for the delivery of a commodity at some future date. The
current price of the futures contract is determined by the participants’ beliefs about the future
price of the commodity.
Financial futures are available on financial instruments such as T-bills, Treasury bonds, and
Eurobonds. These futures contracts allow individual investors, bond portfolio managers, and
corporate financial managers to protect themselves against volatile interest rates.
d: Discuss the characteristics of various alternative investments (e.g. investment companies, real
estate, low-liquidity investments).
Investment companies. Instead of direct investment, many investors choose to acquire their
investments indirectly by purchasing shares in mutual funds. Categories of mutual funds
include money market funds, bond funds, common stock funds, equity funds, international
funds, and balanced funds.
Real estate is an important investment option that can greatly improve the diversity of your
portfolio since real estate returns have a low correlation with stock and bond returns. The
easiest form of real estate investment is the purchase of shares in a Real Estate Investment
Trust. REITs are investment pools specializing in one of a variety of real estate assets. They
are similar to mutual funds. You can invest in construction and development REITs, mortgage
pool REITs, or REITs that own and manage properties.
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