You overhear an international business student say, "investing in foreign currencies is a great investment strategy!"...

You overhear an international business student say, "investing in foreign currencies is a great investment strategy!" How would you respond?

Expert Solution

We invest in foreign currencies if interest rate in our country is less than foreign interest rate but this is not always a great business strategy because there occur a concept exchange rate (value of your currency in exchange for foreign currency). If over the investment period, domestic currency appreciate against foreign currency, you will loose from inesting in foreign currency.

I will take some hypothetical numbers:

Let say domestic interest rate is 10% and foreign interest rate is 15%

You invest $1,000 in UK.

Current exchange rate is 1 dollar = 1 pound (you are based out of US). You get 1,000 pound and rate of interest you will earn is 150 pound.

If over the investent period 1 dollar = 1.5 pound, it means that you get 770.5 dollar from 1,150 pound after investment period. On the other hand, you will get 1,100 while investing in US.

So, I would say if someone can predict exchange rate, he / she must invest.

Rahul Sunny answered 1 year ago

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