A multinational company may prefer to hold sizeable cash balances in one currency rather than another because:
A) of low interest rates existing in one country.
B) one country's currency may be weaker relative to the dollar.
C) of interest rate differentials on short term investments.
D) both currencies are at parity.

Question

Quizplus · Accepted Answer

Interest rate differentials on short term investments can make it more profitable for a company to hold cash balances in one currency over another. This allows the company to earn more interest on its holdings, increasing its overall profitability. A and B may also be factors, but they are not as strong as C in determining which currency to hold cash balances in. D is not a relevant factor as the question implies a choice between two different currencies, not parity.

A Multinational Company May Prefer to Hold Sizeable Cash Balances