Exchange rate changes decrease risk of foreign investment, Financial Management

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Would exchange rate changes all time increase the risk of foreign investment? Discuss the condition within which exchange rate changes may actually decrease the risk of foreign investment.

Answer:  Exchange rate changes require not all the time increase the risk of foreign investment. While the covariance between exchange rate changes and the local market returns is adequately negative to offset the positive variance of exchange rate changes, exchange rate volatility can actually decrease the risk of foreign investment.


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