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:

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If the foreign currency movements against the U.S. dollar exhibit low correlations, the U.S. firm can reduce its overall risk by diversifying its foreign currency investments. This means that by investing in multiple foreign currencies with low correlation to each other, the firm can potentially reduce the risk of losses and increase the probability of generating a higher effective yield on its portfolio of currencies (relative to the domestic yield). In contrast, highly or perfectly positively correlated foreign currency movements may cause the U.S. firm to experience losses on multiple currencies simultaneously, which could offset the higher interest rate income. Therefore, low correlation is the best choice for maximizing yield while mitigating risk.

Assume That There Are Several Foreign Currencies That Exhibit a Higher