Fin 358 International Finance Project
The first part, I: Country Analysis, of the project will serve to provide the reader with a clear picture of
how Denmark’s Macroeconomic qualities and data shape it as an economy and country. The goal of the
presented data in I: Country Analysis section of this project is to provide sufficient information in order
for the reader to proceed to the second part of the project: II: Investment Analysis. In this part of the
paper I will discuss investment opportunities, as well as restrictions and risks for the international
investor seeking capital gains in Denmark.
I: Country Analysis
Before getting into the different facts, analysis and eventually discussions, which will be derived from
Denmark’s economic data; providing the uninformed reader with a few basic, informative characteristics
of Denmark, will help the reader relate, as well as understand, the issues and possibilities the economy
of Denmark possesses.
I: Country Analysis (macroeconomic trends):
Denmark (dark-green marked country).
Member of the Scandinavian region.
Capital: Copenhagen (Approx. 1,900,000 inhabitants).
Approximate population is 5,600,000
(600,000/5,600,000=10.7% not born in Denmark).
Currency: Danish Krone (Exchange rate as of 8/5/2015 to
the U.S. Dollar is DKK6.86/1USD).
Memberships include but are not limited to: The UN, OECD,
EU, NATO, Schengen, IMF and WTO.
Monarchy.
Government: The liberal party.
1
st place in least corrupt countries in the world 2013.
Corporate tax rate: 24.5%; Personal income 37.48-59%.
Very open to foreign investments (foreign and domestic
investors generally treated equally under law).
Central Bank: Danmarks Nationalbank.
This part of the project will be divided into 7 different sections:
1. Balance of Payments-Current Account Surplus or Deficit (All Values in US Millions)
2. Exchange Rate (Fixed Rate with the Euro)
3. GDP Growth
4. Inflation
5. Monetary Policy
6. Fiscal Deficits/Surpluses
7. Yields on Government Bonds Compared to the US T-Bonds for the last 5-10 Years
1: Balance of Payments-Current Account Surplus of Deficit (all values in US millions):
Definition of Current Account: “The difference between a nation’s savings and its investments. The
current account is an important indicator about an economy’s health. A positive current account balance
indicates that the nation is a lender to the rest of the world.”-Investopedia
According to the data gathered from the IMF’s database, the current account has enjoyed a trade
surplus from 2009 through 2014; exports have exceeded imports. Exports ranged from 91,108.11 to
111,671.35 with an increasing trend from 2009-2011 at 91,108.11-111,245.26. In 2012 the exports
dropped to 105,449.55 and climbed back to its peak at 111,671.35 in 2013, where it has kept a steady
level. An important detail to remember is that the balance on goods and services also has remained
postive throughout the same period; at an almost entirely increasing level, with merely minor drops.
One reason for this minor drop in exports relative to imports in 2012 can be explained by the
appreciation in the DKK relative to the Euro in late 2011-early 2012, causing the Danish exports to
become more expensive to surrounding nations with the Euro; notable that it is a minor decrease in
exports considering this movement in currency appreciation/depreciation.
The quantitative data presented in the “Balance of Payments” above, can be further explained using the
average and standard deviation. These low standard deviations calculated represent stable exports on
both goods and services; as well as stable positive balances in these accounts; I would like to stress the
fact that these numbers have a low volatility, despite the slight increase in the value of the Danish Krone
in 2012 relative to the Euro; indeed is positive for Danish exports.
Category Average Standard Deviation
Goods, Credit (Exports): 𝜇 = Σ
x
n
= 104,325.5533 ∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
= 9,110.024182
Balance on Goods 𝜇 = Σ
x
n
=9,794.407936 ∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
=1,215.327826
2009 2010 2011 2012 2013 2014
Balance of Payments
Current Account (Excludes Reserves and Related Items) 10,767.02 18,182.63 19,874.64 18,749.78 24,248.24 21,493.81
Goods, Credit (Exports) 91,108.11 95,029.88 111,245.26 105,449.55 111,671.35 111,449.17
Goods, Debit (Imports) 82,126.26 85,904.67 101,102.08 96,947.44 99,785.56 101,320.69
Balance on Goods 8,981.85 9,125.22 10,143.19 8,502.11 11,885.79 10,128.30
Services, Credit (Exports) 56,243.31 61,211.25 66,494.40 65,999.26 70,686.08 72,486.81
Services, Debit (Imports) 52,338.06 52,310.15 58,643.06 58,179.69 63,268.76 64,238.57
Balance on Goods and Services 12,887.09 18,026.31 17,994.52 16,321.67 19,303.10 18,376.73
Services, Credit (Exports): 𝜇 = Σ
x
n
= 65,520.18152 ∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
=6,017.081574
Balance on Goods and Services 𝜇 = Σ
x
n
=17,151.57199 ∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
=2,301.319483
This numeric data supports the stability and non-exisiting volatility of Denmark’s goods and services’
difference between exports and imports; the fact that Denmark is running a stable trade surplus.
The financial account has a good, but different story; it’s increased dramatically from 2009-2014; from a
-26,358.65 to +35,340.33 in 2014. This could be because Danes are purchasing less foreign assets (such
as real estate), whereas foreigners have been acquiring more Danish assets.
This positive change would indicate an increase in the ownership of Danish real assets (such as bank
deposits, loans, corporate/governemt bonds, equity, factories, real estate etc.) These numbers could
very well indicate an increase in foreign business interest in Denmark. The average for the financial
account is 9,839.391115; and with a very high standard deviation of 23,079.13275. It should be noted
that this high standard deviation is positive in this case; it represent a drastic increase in the acquisitions
of Danish assets made by foreigners, and possibly a decrease in the purchases of foreign assets made by
Danish citizens.
However, the balance on the current, capital and financial account together has gone from a positive
33,670.67 to a negative 7,998.67 after net errors and omissions.
2: Exchange Rate: (Fixed Rate with the Euro):
For the most relevant anlysis to be reached I’ll focus on the exchange rate between the Danish Krone
(DKK) and the Euro; I’m doing this since the majority of Denmark’s trade is through the use of Euros,
between other members of the EU (However, I’ll also include the exchange rates between the U.S.
Dollar and Danish Krone, since this is a class at an American university). To reach a more in depth
analysis/picture of the exchange rate of the Danish Krone; including a quick note about the relationships
of the Norweigan and Swedish Krona compared to the Danish Krone is only unavoidable. This is because
these 3 currencies are very closely related and compete on a big scale, on a daily basis.
As shown in the graph below, the Danish Krone has had a fairly stable relationship with the Euro since
January of 2000; it has stayed in between 7.425-7.468; no volatile/extreme changes in value. This is
positive for the investor who (who owns the Euro as his/her domestic currency) might be interested in
Denmark; this graph doesn’t only show the relationship between the Danish Krone and Euro for the past
couple of years; this is almost 15 years worth of data (when going even further back in time, we still only
see minor controlled changes in value). The trendline included in the graph shows this seemingly
Financial Account (Excludes Reserves and Related Items) -26,358.65 -5,326.85 7,887.28 17,345.52 30,148.71 35,340.33 33,670.67 4,279.69 10,554.14 1,852.06 -647.33 -7,998.67
immovable relationship in value between the Danish Krone and Euro, and how it stays in the
DKK7.44/1€ to DKK7.456/1€.
Based on the historical performance of the Danish Krone, it has presents itself as a very stable currency
with little or no drastic change in value, when comparing it to its closest competitors; the Euro, Swedish
and Norweigan Krona. It has stayed in the same close range with the Euro, and been stronger than those
of Sweden and Norway for decades.
7.4
7.41
7.42
7.43
7.44
7.45
7.46
7.47
Jan-00
Dec -00
Nov-01
Oct-02
Sep-03
Aug-04
Jul-05
Jun-06
May-07
Apr-08
Mar-09
Feb-10
Jan-11
Dec -11
Nov-12
Oct-13
Sep-14
Aug-15
DKK/EUR
0
1
2
3
4
5
6
7
8
9
10
Jan-00
Dec -00
Nov-01
Oct-02
Sep-03
Aug-04
Jul-05
Jun-06
May-07
Apr-08
Mar-09
Feb-10
Jan-11
Dec -11
Nov-12
Oct-13
Sep-14
Aug-15
DKK/USD
As mentioned above I would not deem it
anything else than appropriate to also
compare the performance of the Danish
Krone to the Swedish and Norweigan Krona.
These currencies have many similarities and
are fairly close in terms of their value. The
Danish Krone has been stronger than the
Swedish Krona since November 1992; and
stronger than the Norweigan Krone since
January 1991 (according to the Pacific
Exchange Rate Service). The reason why this
is worth mentioning is because these
currencies are very tighly related and
intervene in each others’ economies
constantly. It is possible to pay with Danish
Kroner in Sweden and Norway, and vice
versa.
Interestingly enough; the U.S. Dollar
actually dropped in value compared to the
Danish Krone during the financial crisis (the
drop in value started in August 2006 and
went to 4.73DKK/1$ in July 2008); after that
its trend stayed in the 4.5DKK-5.9DKK/1$
until December 2014, where it went to
6.0356DKK/1$. The latest rate between the
Danish Krone and U.S. Dollar was
6.8386DKK/1$ in August 2015 according to
the Pacific Exchange Rate Service. Worth to
note that the Danish Krone stayed strong
against the U.S. Dollar during the financial
crisis of 2008.
3: GDP Growth:
The definition of “Real Gross Domestic Product” (GDP) is an inflation-adjusted measure that reflects the
value of all goods and services produced in a given year, expressed in base year prices. Often referred to
as “Constant Price”, “Inflation-corrected GDP” or “Constant Dollar GDP”.
0
50
100
150
200
250
300
350
400
2013 2014 2015 2016 2017 2018 2019 2020
Billions DKK
GROSS DOMESTIC PRODUCT,
CURRENT PRICES (NATIONAL
CURRENCY BILLIONS)
The “GDP constant Prices (Percent Change)”
graph shows the percentage change in GDP
constant prices from 2013 to 2015; the
continuing numbers are the predictions made
by specialists. The predictions show a positive
increase in the GDP from 2014 through 2020.
Based on the definition above we see that the
value of goods and services are increasing. In
2013 the value had decreased by -0.4870%;
moving along in time it had increased to almost
positive 1% in 2014 where it has been projected
to increase at a decreasing rate until 2020. The
“Gross Domestic Product, Current Prices
(National Currency Billions)” graph, shows us
the decrease from year 2014-2015 from about
340-297 Billion DKK, since 2015 however, it has
been increasing at a steady rate to about 378B
(projected in 2020). These graphs show a
healthy increase in the Gross Domestic Product
of Denmark.
One important graph and “aspect” of the GDP
that should not be left out; it the GDP Per
Capita and its change within the same time
period. One could argue that it “obviously”
follows the exact same trend as the “Gross
Domestic Product, Current Prices (National
Currency Billions)”; since it is the same number
divided by the Danish population. This measure
is however helpful, because it tells us that the
performance of the Danish workforce, and
therefore growth in the economy and an
increase in productivity.
4: Inflation:
Also, as shown in the graph there has been some cases of higher versus lower inflation rates since 2000;
considering that the Central Bank of Denmark wants to keep these rates low, they’ve done a stable job
keeping them low. The highest was in 2008 (financial crisis) and the lowest was in 2014, lower than 1%.
𝜇 = Σ
x
n
=1.93019
0.00
10,000.00
20,000.00
30,000.00
40,000.00
50,000.00
60,000.00
70,000.00
2013 2014 2015 2016 2017 2018 2019 2020
GROSS DOMESTIC PRODUCT
PER CAPITA, CURRENT PRICES
0
0.5
1
1.5
2
2.5
3
3.5
4
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Percent
INFLATION RATE (%)
To sum up, the gross domestic product is one of
the primary indicators of a country’s economic
performance. Per Capita Gross Domestic Product
is used as an indicator of standard of living as
well, with higher GDP per capita meaning a
higher standard of living (one fun fact that may
be interpreted as a supporting argument of the
information given above; Denmark has been
ranked #1,2 and 3 as the happiest nation
worldwide several years in a row, ranked first in
entrepreneurship and equality).
As the central bank of Denmark, Danmarks
Nationalbank is in charge of monetary policies in
Denmark. One of the main objectives of
Danmarks Nationalbank is to ensure stable prices,
meaning, keeping the inflation as low as possible.
It has been the objective of the monetary policy,
for decades now, to keep the exchange rate of
the Danish Krone stable. First this was done to
keep it stable against the Deutsche Mark, now the
Euro. One of the reasons for this is that the cost
of living in Denmark, generally is fairly high. The
main goal is to keep the inflation close to, but
below 2%.
∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
=0.733569%
These statistical measures show us that the average inflation rate during the time period of 2000-2021 will
be (if these inflation rate estimates are correct) lower than 2%; which is the goal of the Danske
Nationalbank. Furthermore, the standard deviation in these numbers is also considerably low; 0.733569%.
What this number tells us is little deviation from the mean (average) of 1.93019%. This is also good news,
considering that these estimates turn out to be true or at least, within a close range.
5: Monetary Policy:
The fixed exchange rate policy means that Denmark’s policy is aimed at keeping the Krone strong/stable
against the Euro; the Central Bank of Denmark conducts monetary policy by setting the monetary-policy
interest rates; furthermore, these interest rates are linked to the lending as well as the deposit facilities
made available by the Central Bank of Denmark to the banks and mortgage banks.
When Denmark changes its interest rates relative to those of the ECB, this normally has an effect on the
exchange rate of the Danish Krone against the Euro; through the money market, the monetary policy
interest rates also affect the lending and deposit rates offered to firms and consumers.
6: Fiscal Deficits/Surplus:
7: Yields on Government Bonds Compared to the U.S. T-Bonds for the Past 5-10 Years:
The yields on Danish Government bonds have actually stayed close to the U.S. T-bonds for many years; the
rates on the Danish bonds have been a little higher than the U.S. rates with the greatest difference
(favorable to the Danish bonds) in 2008, almost 300 basis points difference. At its highest the Danish was
almost 6%, whereas the U.S. T-note was only 3%. The Danish rates, however, have been lower than the U.S.
rates, which was in 2014. Excluding the financial crisis in 2008, the rates on these two have been relatively
close, with a similar pattern in movements, and a stable +0-1% for the Danish rate.
487 487
458
455
460
465
470
475
480
485
490
2011 2012 2013 2014 2015
Amount in Bilion DKK
Year
CENTRAL
GOVERNMENT
DEBT
The Danish Government debt has received the highest
ranking, AAA/Aaa, from the largest international credit rating
agencies. This is partially because of the low level of debt and
the composition of long term-liabilities. There has been a
decline in central government debt as a percentage of the
GDP over the past 2 years, which should be noted since it has
not been that long since the financial crisis, it represents a
turning point after the debt accumulation that happened
during the crisis.
This significant drop in debt, as shown in the graph to the
right, marks a significantly positive change in the performance
regarding government spending.
Generally speaking, Denmark is open to foreign investments. It is a small country with an open economy;
because of its high dependence of foreign trade (exports is the largest component of the Danish GDP)
Denmark trade and investment policies are liberal and truly do, encourage foreign investment. The Danish
business environment has been characterized as one of the most attractive in the world, reflecting a great
macroeconomic environment, excellent infrastructure and a well-educated and flexible labor force.
Restrictions include the purchase of real estate in Denmark by foreigners; EU citizens and companies may
purchase any type of real estate except for vacation properties without authorization from the
government. Non EU citizens need to have been present in Denmark for at least 5 years in a row, before
being allowed to purchase real estate; again, vacation homes require authorization from the government.
This obviously puts a restriction on real estate investment, as a foreign investor.
Denmark has been considering imposing capital controls, but with hardship from banks; reasoning that the
country must allow the free flow of capital, one reason for this being that Denmark is a member of the
European Union. The Spokeswoman for Economy Minister and Deputy Prime Minister Morten Östergaard,
Sigga Nolsoee, said that the government has no plan on imposing restrictions on capital movements.
The political environment in Denmark is very stable, (it has been ranked the least corrupted country in the
world) it is a democratic system, citizens exert their influence indirectly through voting, and generally a very
safe place to be.
Part II: Investment Analysis:
In this part of the paper, there will be paid close attention to the investment opportunities through analysis.
The actual calculations can be viewed in the Excel file submitted.
The major stock index in Denmark is called OMX Copenhagen (^OMXC20), or commonly referred to as C20.
It has the 20 “biggest players” of the publicly traded Danish companies, these include A.P. Møller Mærsk,
Pandora, Vestas, Novo Nordisk with many more.
The index’s data as well as various other, very thorough calculations are all included in the excel file
submitted. This file includes returns, variances, standard deviations, correlations between Denmark, the
U.S. and the World standard, as well as the Sharpe ratio.
The Danish stock index is (in my opinion) a stable index, just to give a quick idea of its performance for the
past 2 months, it has had a return of 0.54% and 0.69%; this positive gain seems to be the general trend. All
this can be seen in the Excel file.
Recommendation based on analysis:
Before I get into my actual recommendations about actions I deem appropriate to take, regarding the
investment opportunities Denmark offers, I would like to address Real Estate Investing, which was briefly
discussed in restrictions in part one of the paper; as an international investor. Considering the harsh
restrictions the Danish government has chosen to put on international real estate investors (mentioned in
the first part of paper) and the tax on capital gains (can be up to 50%) earned from real estate investing;
one could argue, taking your money in other investment directions, would be the better alternative.
Of course there are two sides to this; the negative aspect of successfully investing in real estate in Denmark
is obviously the hefty tax-rate; however, I would still deem it an extremely safe and stable environment to
pursue this kind of capital gain. As mentioned earlier, Denmark has been ranked the least corrupted
country in the world, it provides one of the most effective work-forces worldwide, and it should also be
mentioned that “Danish design” is famous globally (there is a reason for this). Because of these positive
aspects (including many more), real estate investments can be preferable as well as profitable, if the taxrate does not cause too much pain.
Based on the information provided throughout this entire paper, it is my recommendation to invest in the
very stable and secure market Denmark offers. The overall reason for this (referring to the qualitative
aspects in part one) is that Denmark presents a very advanced, internationally focused, safe and advanced
economy. Advanced and internationally focused includes that Danes have been ranked as the number one
non-native English speakers in the world, internationally focused because Denmark is a part of the EU and
Schengen; with little natural resources Denmark needs to use its advantages to stay competitive. It is also
worth mentioning that the state of Denmark’s economy is on the right track, and the Danish Krone is a
stable currency.
Referring to the quantitative data presented in this paper (as well as in the Excel spreadsheet) it is, again,
recommended to invest in Denmark. Even though Denmark has a very, very little economy compared to
many other countries, it still has many opportunities for the international investor. When comparing the
largest index, the C20, in Denmark to the S&P500 in the United States (this is not an entirely fair/realistic
comparison, considering the difference in sizes) we see an enormous difference in risks:
US: ∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
= 311.9
DK: ∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
=25.4
World: ∂ = Σ
√(𝑥−𝜇)
2
𝑛−1
=67.3
These numbers represent the standard deviation in monthly index prices for the last 15 years; one thing to
keep in mind is that the S&P500 includes 500 companies, the C20 only has 20 companies. When analyzing
the Excel file attached, it is also interesting to see how much higher the average annual returns the C20
index offers, compared to that of the S&P500. C20 has an average annual return of 11% while the S&P500
has a 4% average annual return. These higher returns obviously come with a higher annualized standard
deviation; the C20 has a standard deviation of 19%, whereas the S&P had an annualized standard deviation
of 15%. It is worth noticing how much higher the annualized return in Denmark is though:
C20: Average annual return: 11%; Standard Deviation: 19%
S&P500: Average annual return: 4%; Standard Deviation: 15%
That is a difference of 7% in average annual return and only 4% in standard deviation; this increase in
return came at a “lower than expected” risk.
Regarding the correlations between Denmark and the U.S.; it is definitely a noteworthy correlation of about
0.67. Modern Portfolio Theory states that adding assets to a diversified portfolio that have correlations of
less than 1, with each other, can decrease risk without sacrificing return. Such diversification will serve to
increase the Sharpe ratio of the portfolio. When analyzing the data we do see that the general tendency of
the returns is a mirror-effect (increase in the C20 is generally associated with an increase in the S&P500).
When comparing the Sharpe ratios of these indexes; the C20 in Denmark has the highest:
C20: 0.468
S&P500: 0.119
World: 0.049
What the Sharpe ratio tells us is the average return in excess of the risk free rate per unit of volatility or
total risk; generally, the higher the Sharpe ratio, the more attractive the risk adjusted return is.
When considering the Sharpe ratio it is very clear that the C20 offers the investor a bigger average return in
excess of the risk free rate per unit of volatility; which again, represents a reason as to why international
investors should strongly consider Denmark.
Based on the info included in this project it is my advice to invest in Denmark. The numbers included speak
for themselves, it is far from a bad place to put ones money; Denmark has a stable economy, is open to
foreign investment, it is a very advanced nation, the economy and people have proved themselves to do
very well while relying mostly on the exports of services (almost no natural resources), the currency has
also proved to stay fairly stable during long periods of time, etc.
Overall, a very stable economy with great potential for capital gains.
