Assume that there are several foreign currencies that exhibit a higher interest rate than the U.S. interest rate. The U.S. firm has a higher probability of generating a higher effective yield on a portfolio of currencies (relative to the domestic yield) if:

Question

Quizplus · Accepted Answer

If the foreign currencies' movements against the U.S. dollar have low correlations, it reduces the risk of the portfolio because losses in one currency can be offset by gains in another. Perfectly positively correlated currencies (choice B) have the highest risk, and highly correlated currencies (choice A) also increase the risk of the portfolio. Therefore, the best option is low correlations.

Assume That There Are Several Foreign Currencies That Exhibit a Higher