This paper differentiates between country risk--the probability that a country will default on its obiigations--and two forms of international banking risk: (1) the extent to which a bank's foreign activities affect the cost of equity capital; and (2) the extent to which a bank's foreign activities affect the probability of bankruptcy. The paper focuses on the latter form of international banking risk.Using Chebyshev's Inequality, it is pointed out that the risk of bankruptcy is influenced by the mean as well as the variance of the return distribution. Consequently, restrictions on the (international) composition of a bank's portfolio may increase rather than reduce the probability of bankruptcy.

The well known Sharpe-Lintner-Mossin capital asset pricing model (CAPM) assumes the existence of stability in the price level so that the market price of risk (MPR) measured in nominal terms is the same for all risky assets in an equilibrium market. Friend, Landskroner and Losq [5, hereafter F-L-L] have recently shown that CAPM measured in nominal terms understates the MPR if an uncertain inflation is expected and if a covariance between the rate of return on the market and the rate of inflation is positive (p. 1287).

Since the early work of Durand (1941), there has been considerable interest in using quantitative models of consumer credit behavior for credit-granting decisions. Most models are based on the concept of “scoring” by use of weights usually determined as statistically significant coefficients of some linear statistical model, frequently the linear discriminant model. It is the purpose of this note, however, to propose maximum likelihood estimation of the logit model as an alternative, and to compare the two models in a “scoring experiment.”

The unique characteristic of a foreign asset is that the real purchasing power of the cash flows from the asset depends on the exchange rate prevailing on the conversion date. A naive view is that this dependence exposes foreign assets to exchange risk proportional to the volatility of the exchange rate and, other things equal, makes foreign assets much riskier than domestic ones. Anothe extreme is that for nonmonetary foreign assets, purchasing power parity (PPP) causes exchange rates to move inversely todifferential inflation rates, thereby eliminating exchange risk. Aliber and others maintain that a similar argument applies to foreign monetary assets. The international Fisher effect (IFE) causes the exante equilibrium return on all default-free monetary assets, measured in the domestic currency, to be the same regardless of the currency denomination of the instrument. The fact is, however, that PPP and IFE cannot be expected to hold instantaneously throughout time, but only on average over time. Consequently, although foreign assets may promise the same expected return as domestic assets, they will have a higher variance of return as seen by domestic investors. To justify the holding of foreign assets by a domestic investor, one must introduce portfolio considerations, the possibility of consumption expenditures denominated in the foreign currency, heterogeneous expectations, or market imperfections.

The purposes of this article are two. Some extensions to Mayers’ [1] classical work on portfolio building in the presence of nonmarketable assets are presented. In addition the implications of certain simple forms of taxation and redistribution are investigated.

Commonly defined, a market is efficient if prices always fully reflect available information. That market might be viewed as consisting of two major segments: an information market and pricing mechanism. The efficiency has been amply documented elsewhere. The information market, however, should be afforded increased attention. In particular, the efficiency of the information market may vary across securities and with respect to particular securities, across time. Stated another way, the degree of imperfection in the information market may vary across securities and across time, resulting in a relative efficiency phenomenon. The presence of such a phenomenon would offer research opportunities yielding a greater understanding of the functioning of the information market and the pricing of securities.

One of the innovative and successful new markets developed in recent years has been the registered exchange for the trading of option contracts. Key innovations provided by the option exchanges include the standardization of some contractual terms and the creation of a central clearing corporation to serve as issuer and obligor of each option contract, thus severing the contractual link between a specific option writer and buyer. These changes have facilitated the trading of existing call options in the secondary market and have provided increased liquidity, continuous public reporting of prices, better information on trading volume and open positions, and reduced transaction costs.

As the multinational corporation (MNC) becomes the norm rather than the exception, the need to internationalize the tools of domestic financial analysis is apparent. A key question is: What cost-of-capital figure should be used in appraising the profitability of foreign investments? This paper seeks to provide a comprehensive approach to analyze the cost-of-capital question. It begins by extending the weighted cost-of-capital concept to the multinational firm. It then builds on previous research to address the following related topics: national or multinational financial structure norms; the role of parent company guarantees; the costing of various fund sources particularly when exchange risk is present; the impact of tax and regulatory factors; risk and diversification; and joint ventures.

Guilford C. Babcock, Comment: Duration and Bond Portfolio Analysis, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 683-685

The rising cost of funds internationally is forcing multinational corporations to pay more attention to effective cash management on a global basis. However, the available literature is preoccupied with cash management in only one currency. This is a serious oversight given the heavy involvement of U.S. firms overseas. In 1970, for example, the ratio of foreign source earnings plus income from abroad (royalties, fees, service charges) to total U.S. corporate after-tax profits was over 25 percent [14]. If export and import activities were included, this statistic would be more impressive yet.