If a firm diversifies its financing sources, it will be pre-positioned to take advantage of temporary deviations from the International Fisher Effect.

Question

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The International Fisher Effect suggests that changes in exchange rates are related to differences in interest rates between countries. If a firm diversifies its financing sources, it may have access to lower interest rates in different countries, which could allow it to take advantage of temporary deviations from the International Fisher Effect by borrowing in a country with a lower interest rate and then investing those funds in a country with a higher interest rate. This could potentially result in profits for the firm if the exchange rate changes in its favor.

If a Firm Diversifies Its Financing Sources, It Will Be