One argument for exchange rate irrelevance is that:
A) MNCs can hedge exchange rate exposure much more effectively than individual investors.
B) investors can invest in a diversified stock portfolio of MNCs that have different exposures to exchange rates.
C) purchasing power parity does not hold very well.
D) MNCs are typically not diversified across numerous countries.

Question

Quizplus · Accepted Answer

By investing in a diversified stock portfolio of MNCs that have different exposures to exchange rates, investors can mitigate the impact of fluctuations in any one currency on their overall returns. This reduces the relevance of exchange rates for individual investors. Additionally, MNCs may also have more resources and expertise to effectively mitigate and manage their own exchange rate exposure through hedging strategies, which further reduces the relevance of exchange rates for these firms. However, this argument does not necessarily imply that exchange rates are completely irrelevant for all investors or firms, as other factors may still play a role in determining their financial performance.

One Argument for Exchange Rate Irrelevance Is That