1. Assume that foreign currencies X, Y, and Z are highly correl¬ated. If a firm diversifies its financing among these three currencies, will it substantially reduce its exchange rate exposure (as opposed to borrowing all funds from one of these foreign currencies)? Explain.
2. Assume that your company needs dollars. It borrows euros at a lower interest rate than that for dollars. If interest rate parity exists and if the forward rate of the euro is a reliable predictor of the future spot rate, what does this suggest about the feasibility of such a strategy?
3. Assume that as a treasurer of a U.S. corporation, you believe that the British pound's forward rate is an accurate forecast of the pound's future spot rate. What does this imply about your decision of whether to invest cash in the U.S. or in the U.K.?
4. Explain how the MNC's optimization of cash flow can distort the profits of each subsidiary.