The rise of globalization is due to the many companies that have become multinational corporations for various reasonsfor 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 wellfor 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 the supply of a currency increases, the currencys value will decrease relative to other currencies.

When interest rates increase in a country, its currencys value tends to increase because foreign investors convert their home currency to invest in these higher yielding securities.

An increase in inflation tends to lower the currencys value with respect to other currencies with lower inflation rates.

If a government intends to prevent its currencys value from falling relative to other currencies, it will sell its currency from reserves in the market.

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 ($) and the Canadian dollar (C$):

	Spot Exchange Rate	One-Year Forward Exchange Rate
Canadian dollar (U.S. dollar/Canadian dollar)	0.8932	0.9133

The current one-year interest rate on U.S. Treasury securities is 6.35%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk?

4.01%

3.21%

4.61%

3.41%

Interest rate parity recognizes that when you invest in a country other than your home country, two factors affect your investmentreturns on the investment itself and changes in the exchange rate. Which of the following would cause the overall return on your investment to be higher than the investments stated return?

The currency in which the investment is denominated depreciates relative to your home currency.

Your home currency appreciates relative to the currency in which the investment is denominated.

The currency in which the investment is denominated appreciates relative to your home currency.