If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual volatility of each currency is ____.
A) high; low
B) high; high
C) low; low
D) low; high

Question

​If a U.S. firm needs dollars but borrows a foreign currency portfolio, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual volatility of each currency is ____.
A) ​high; low
B) ​high; high
C) ​low; low
D) ​low; high

Quizplus · Accepted Answer

If the correlations between currencies in the portfolio are high, it means that the movements of the currencies are highly related, which could lead to larger losses if one currency in the portfolio goes down. If the individual volatility of each currency is also high, it means that each currency is prone to large swings and unpredictable movements, which could lead to an uncertain financing rate for the U.S. firm. Therefore, the uncertainty of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are high and the individual volatility of each currency is high.

​If a US Firm Needs Dollars but Borrows a Foreign Currency Portfolio

If a US Firm Needs Dollars but Borrows a Foreign Currency Portfolio