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Development and Evaluation of International Financing Models

Jeff Madura
Management International Review
Vol. 25, No. 4 (4th Quarter, 1985), pp. 17-27
Published by: Springer
Stable URL: http://www.jstor.org/stable/40227768
Page Count: 11
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Development and Evaluation of International Financing Models
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Abstract

This paper incorporates an ex ante analysis to evaluate various techniques for international financing. An ex post analysis would have demonstrated how the mean-variance model (in a revised form) can be applied to identify currency portfolios which exhibit the lowest expected financing cost for a given level of risk. However, this analysis requires the assumption that firms have perfect foresight regarding the variance-covariance matrix for exchange rate fluctuations. The ex ante analysis was instead used here to provide more realistic implications regarding the feasibility of applying the mean-variance model for international financing decisions. Results suggest that use of the historical variance-covariance matrix as a forecast input for international financing decisions is inadequate from a practical perspective, since it was often outperformed by naive models. Further research is needed to successfully operationalize the application of the mean-variance model to international financing decisions.

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