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

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:​

Quizplus · Accepted Answer

If the foreign currencies movements against the U.S. dollar exhibit low correlation, it implies that the currencies tend to move independently of each other. Hence, the portfolio of foreign currencies will not all move in the same direction at the same time. This diversification benefit reduces the portfolio risk and increases the likelihood of generating higher effective yield on the portfolio of currencies relative to the domestic yield.

Assume That There Are Several Foreign Currencies That Exhibit a Higher