Which of the Following Is Probably NOT an Advantage of Foreign

question 16

Multiple Choice

Which of the following is probably NOT an advantage of foreign exchange risk management?

• A) the reduction of the variability of cash flows due to domestic business cycles
• B) increased availability of capital
• C) reduced cost of capital
• D) All of the above are potential advantages of foreign exchange risk management.

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Definitions:

Risk-Free Profits

Profits made through investment strategies that are supposed to incur no risk to the investor.

Interest Rate Parity

A financial theory stating that the difference in interest rates between two countries will be offset by changes in the exchange rate between their currencies.

Covered Interest Arbitrage

The practice of exploiting the interest rate differential between two countries while hedging against exchange rate risk using forward contracts.

Portfolio's Beta

A measurement that indicates the volatility, or systematic risk, of a portfolio relative to the overall market.