Should Interest Rate Parity Prevent MNCs from Investing in Foreign Currencies?
Point Yes. Currencies with high interest rates have large forward discounts according to interest rate parity. To the extent that the forward rate is a reasonable forecast of the future spot rate, investing in a foreign country is not feasible.
Counter-Point No. Even if interest rate parity holds, MNCs should still consider investing in a foreign currency. The key is their expectations of the future spot rate. If their expectations of the future spot rate are higher than the forward rate, the MNCs would benefit from investing in a foreign currency.
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