Louise Tremblay Case Scenario
Louise Tremblay, CFA, is a portfolio manager for a global equity fund domiciled in the United States. She wants to add positions in foreign stocks of Canada and Brazil, two countries where there is currently no exposure.Tremblay places a call to Hal Baroque, the firm’s economist, to arrange a meeting to discuss both his outlook for these economies and some issues related to foreign exchange relationships and international asset pricing.During the meeting, Baroque presents the information he gathered in preparation for their discussion, as shown Baroque begins his discussion by reviewing some basic relationships that are useful in understanding the interplay between exchange rates, interest rates, and inflation. He remarks, "Theoretically, the interest rate differential between two countries should be equal to the expected inflation rate differential over the term of the interest rate.”Tremblay provides two justifications for adding Canadian stocks to her portfolio. First, the real returns are currently higher in Canada than in the United States. Second, by her own prediction, Canada will experience a higher economic growth than will the United States over the next three to five years, thereby potentially leading to the appreciation of Canadian currency relative to the U.S. dollar