A) DECREASES / APPRECIATES B) DECREASES / APPRECIATES C) CANNIBALIZATION / ARBITRAGE / FLOTATION / CONVERSION

2. 2: Multinational Financial Management: Interest Rate Parity The general relationship between spot and forward exchange rates is specified by a concept called interest rate parity. It specifies that investors should expect to earn the same return in all countries after adjusting for risk. The relationship is expressed in the following equation: (1+1) Forward exchange rate Spot exchange rate Both the forward and spot rates are expressed in terms of the amount of home currency received per unit of foreign currency. Your overall return will be higher than the investment's stated return if the currency in which your investment is denominated -Select relative to your home currency. On the other hand, your overall return will be lower if the foreign currency you receive -Select- in value. If this relationship doesn't hold, currency traders will buy and sell currencies engaging in -Select- until the relationship does hold