The rise of globalization is due to the many companies that have become multinat
ID: 2798018 • Letter: T
Question
The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well-for example, political risk and exchange rate risk. Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply If a government intends to prevent its currency's value from falling relative to other currencies, it will sell its currency from reserves in the market. An increase in inflation tends to lower the currency's value with respect to other currencies with lower inflation rates When interest rates increase in a country, its currency's value tends to increase because foreign investors convert their home currency to invest in these higher yielding securities. If the supply of a currency increases, the currency's value wil decrease relative to other currencies. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar (S) and the Canadian dollar (C$): Spot Exchange Rate 0.8876 One-Year Forward Exchange Rate 0.9023 Canadian dolar (U.S. dollar/Canadian dollar) The current one-year interest rate on us. Treasury securities is 6.89%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? o 4.64% 5.41% 5.15% Q 4.89% Because the investor can earn a riskless positive return by taking advantage of the interest rates and the spot and forward currency values between two countries, the transaction will be called kind of arbitrage will not last long, and the spot and forward rates will be forced into equilibrium. interest arbitrage. This Which of the following statements is implied by interest rate parity theory? O Interest rates in all countries with the same political risk should be the same. O An investment in one's home country should hav e the same return as a similar investment in a foreign country O Interest rates in all countries should be the same. O If two countries have the same inflation rate, they should have the same interest rate, too.Explanation / Answer
a.
Exchange rate between two currency depends on so many factors like, Demand and supply of currency, Interest rate in both country, Inflation rate in both country. if inflation rate in one country is high as compared to other country then it currency must be depreciate against other currency. Similarly, in interest rate in one country is high as compared to other country then it currency will appreciates.
Option (B), (C) and (D) is correct answer.
b.
One year interest rate is calculated below using interest rate Parity formula:
Forward rate = Spot rate × (1 + US rate) / (1+ Canada rate)
(1 + Canada Rate) = (0.8876 / 0.9023) × (1 + 6.89%)
= 0.9837 × 1.0689
= 1.0515
Canada rate = 5.15%
One year interest rate in Canada is 5.15%.
d.
According to interest rate parity, an investment in one home country have the same return as a similar investment in foreign country.
Option (B) is correct answer.
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