Page 14 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.79, # 2, 2022, pp. 4-18

, is called the degree hostility and in the range of 0-1. If = 0, then the countries are
friends and the local and foreign markets are considered as being the same. If = 1,
the countries are absolute enemies. The closer is to zero, the closer the relations of
the countries with each other will be and the closer is to 1, the more the degree of
hostility between countries will be.

Now, it is assumed that,

= 1 and = 1 (3)

These two assumptions are completely logical concerning the financial theories since
according to the financial theories, higher return in the market occurs where more risk

is tolerated. This condition is established for every market (local and foreign). = 1

shows that if this relation is constant, in order to achieve higher return, more risk
should be tolerated and vice versa.

Also, assume that:

= , ≥ 1 (4)

This assumption is logical since the investor will invest in the foreign market when
the return on foreign investment is at least equal to domestic market (lower return in
local market than foreign market).

Moreover,

= , ≥ 1 (5)

This assumption is logical since the investor will invest in the foreign market when
the return on foreign investment is at most equal to the domestic market (lower risk
in foreign market than domestic market).

Now, Eq. (1) and (2) will be equal to following equations according to Eq. (3), (4) and
(5):

2 1

= 1+ (6)

And,

1 2
= 2 − 0 < ≤ 1 و 0 ≤ ρ ≤ 1 (7)

2

Now, by differentiating the utility functions, we will have:

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