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: An American investor is considering investing $1,000 in default-free 90-day Japanese bonds that promise a 3% annual nominal return. The spot exchange rate is 102.19 per dollar. The 90-day forward exchange rate is $100.66 per dollar. The investor's annualized return on these bondsif he or she can lock in the dollar return by selling the foreign currency in the forward market-will be 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 interest arbitrage. This kind of arbitrage will not last long, and the spot and forward rates will be forced into equilibrium. Which of the following statements is implied by interest rate parity theory? Interest rates in all countries with the same political risk should be the same. An investment in one's home country should have the same return as a similar investment in a foreign country. Interest rates in all countries should be the same. A product bought in one country should have the same price in other countries, adjusted for exchange rate. 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: An American investor is considering investing $1,000 in default-free 90-day Japanese bonds that promise a 3% annual nominal return. The spot exchange rate is 102.19 per dollar. The 90-day forward exchange rate is $100.66 per dollar. The investor's annualized return on these bondsif he or she can lock in the dollar return by selling the foreign currency in the forward market-will be 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 interest arbitrage. This kind of arbitrage will not last long, and the spot and forward rates will be forced into equilibrium. Which of the following statements is implied by interest rate parity theory? Interest rates in all countries with the same political risk should be the same. An investment in one's home country should have the same return as a similar investment in a foreign country. Interest rates in all countries should be the same. A product bought in one country should have the same price in other countries, adjusted for exchange rate
