The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is

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According to the asset market theory, the most important factor influencing the demand for domestic and foreign securities is their expected return relative to one another. Investors will demand the currency of a country that has a higher expected return on its securities compared to other countries. Therefore, the expected return on these assets is the crucial factor in determining the demand for domestic and foreign currencies. The other factors listed (ability to convert into cash, riskiness, government restrictions) may also play a role, but they are not as important as expected return in this theory.

The Asset Market Theory of Exchange Rate Determination Suggests That