Assume that there are several foreign currencies offering higher interest rates than the Australian dollar. An Australian firm has a higher probability of generating a higher effective rate of return on a portfolio of currencies than on the domestic interest rate if the exchange rates between the Australian dollar and the foreign currencies are:

Question

Quizplus · Accepted Answer

When exchange rates between the Australian dollar and foreign currencies are weakly correlated, it implies that the movements in exchange rates are less synchronized. This scenario offers opportunities for diversification benefits in a portfolio of currencies, potentially leading to a higher effective rate of return compared to investing solely in assets denominated in Australian dollars. Diversification reduces risk, and when exchange rates do not move in tandem, losses in one currency might be offset by gains in another.

Assume That There Are Several Foreign Currencies Offering Higher Interest