1. Interest rate parity Aa Aa The rise of globalization is due to the many compa
ID: 2800907 • Letter: 1
Question
1. Interest rate parity Aa Aa 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. An increase in inflation tends to lower the currency's value with respect to other currencies with lower inflation rates. 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. 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 will 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:Explanation / Answer
an increase in inflation tends to lower
if the supply of currency increases
Annualized return=((1000*102.19*4%*90/360)/100.66)/1000=1.0152%
riskless/covered
an investment in one's home country should have the same return as a similar investment in a foreign country
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