When looking at all of the opportunities associated with investing in international opportunities, it is important for personal investors to remember how it is that these potential returns come in hand with a variety of additional risks that are exclusive to that kind of position. Between the currency, interest rate risks between the two countries alone, a personal investor needs to be aware of which products can be used in conjunction with their foreign investments, so as to fortify the position over the longer term.
By far the largest risk associated with foreign investment stems from the fluctuations that occur between the different currencies involved in the transaction. For example, an American investor may realize a 9% nominal gain by holding funds in an Indian Certified Deposit, which is a reasonably safe investment in that country, and provides an extremely high comparative rate of return.
However, because of the way in which the inflation rate on the Indian Rupiah tends to exceed 10%/year against the US Dollar, the investor will actually lose money against the currency exchange rate, and walk away worse off as a result of the investment. Alternatively, if the investor has placed their money into a shared deposit in a country with an appreciating currency, such as the Czech Republic, the investor could walk away with an even greater return on the exchange rate. Read More →