Foreign Exchange Rate and Its Place in Capital Asset Pricing Model

Abstract

With respect to currency market and these problems are closer to it such as foreign currency translation and effect on prices of capital assets, to estimate actually required return of capital assets, we should consider these variable to our models. Therefore the concept of the capital asset pricing model (CAPM) is extended to international investments. This subject is emphasized by management on the one hand and investors on the other hand. When looking at investments in an international setting, incorporate foreign exchange risks are introduced. Some of the international capital asset pricing models are limited to one factor and others are multifactor models with attention to foreign currency that impact of the portfolio. Globalization and expansion of investment activities in different markets led to introduce and developed an international capital asset pricing model. This model evaluates the performance of various components of the investment portfolio that they composed of a variety of unlike the currency basis. Furthermore, the model in various financial markets, aggregate and transforms their results based on a uniform currency basis in the interpretation of results, and it's generalized to other sectors. Finally, it can provide comprehensive perspectives for investors.