1. Since interest rate parity holds, then MNCs should advise their subsidiaries against investing any excess cash in a foreign country. Is this statement correct? Explain your answer.

2. In a developing country, would an increase in the interest rate always be followed with an appreciation of the countrys currency? Explain your answer.

3. A U. S. firm plans to invest 75 percent of its excess cash in a one-year British pound (GBP) deposit and the remaining 25 percent in Indian rupees (INR). It is assumed that the spot rate changes for GBP and INR are independent. The possible percentage changes in the spot rate of the two currencies for the next year are forecasted as follows.

Currency	Possible % change in the spot rate	Probability
GBP	0.02	0.2
GBP	0.03	0.8
INR	0.04	0.7
INR	0.05	0.3

The annual interest rate on the GBP is 3%, the annual interest rate on the INR is 4%, and the annual interest rate in the U.S. is 6%. The

1. Calculate the possible effective yields of the overall portfolio. (4 marks)

2. Would you advise the U. S. company to invest its excess funds abroad or at home? Justify your answer considering that the MNC could place the excess funds in GBP deposit only, INR deposit only, in USD deposit only, and in the 75-25 portfolio of currency as calculated earlier) (6 marks).