2. What implications would a decrease in foreign interest rates have for the dir

Question

2. What implications would a decrease in foreign interest rates have for the direction of international financial repositioning and for the current spot exchange rate?

A) Repositioning toward domestic currency assets and the domestic currency depreciates

B) Repositioning toward foreign currency assets and the domestic currency depreciates

C) Repositioning toward domestic currency assets and the domestic currency appreciates

D) Repositioning toward foreign currency assets and the domestic currency appreciates

Explanation / Answer

The correct option is (C). If foreign interest rate decreases that means interest rate differential increases between domestic and foreign. investment in domestic is more attractive and the demand of domestic countries increases and currency appreciates.

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