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Intl Finance Cheat sheet

International Finance (Nanyang Technological University)

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Class 1-introduction to International Finance

Agency Problems: conflict of goals between managers and shareholders
Agency costs: cost of ensuring managers maximize shareholder wealth.
Difficulties:
 Monitoring managers of distant subsidiaries (foreign)
 Managers from different culture (different values)
 Size of large MNC

Parent control of Agency Problems:

Clear communication of goals for each subsidiary and give bonus/compensation based on performance.
Management structure of MNC
 Centralized: Allows managers of parent to control foreign subsidiaries and there reduce power of subsidiaries managers
 Decentralized: more control to subsidiary managers( more agency cost)

Why firms Pursue International Business:

 Comparative Advantage: each country is entitled to certain advantages, hence specialization will increase production efficiency, this encourages trading.
 Imperfect Markets Theory: Factors of production are not perfectly mobile hence companies have incentive to seek out foreign opportunities
 Product Cycle Theory: As a firm matures, it recognizes opportunities outside its domestic market (export product and the establish foreign subsidiary to establish presence and reduce costs)

How firms engage in International Business:

 International Trade: export and import with no capital at risk and internal facilitates the trade (Adv/payment)
 Licensing: allows a firm to provide its technology(patents/brand) in exhcnage for fees(no need major investment but difficult to ensure quality)
 Franchising:provide specialized sales/service strategy
 Joint Ventures: allows 2 firms to apply their respective cooperative advantages
 Acquisitions of existing Operations: quickly obtain a large portion of foreign market share( large investment hence more risk)
 Establishing new foreign subsidiaries:require large investment but tailored to the firms needs.

Uncertainty surrounding MNC cashflows:

 Exposure to international economic conditions:eg GDP fluctuations
 Exposure to international political risk: foreign government may increase tax/impose barriers on MNC’s subsidiary
 Exposure to exchange rate risk:
Affect the expected dollar cash flows

Cost of Capital:
Higher level of uncertainty increase the return on investment required by investors(WACC goes up)
Class 2: International flow of funds
Balance of Payments(credit (+, inflow):
Current account: Payments for goods and services(balance of trade, Imports-exports), Factor income payments(income from foreign securities),transfer payments
Capital Account: summary of flow of funds resulting from sale of assets( patents)
Financial Account: DFI(investment in foreign fixed asset), portfolio investment(long term securities)

Impact of outsourcing on Trade

Maximizes the value of the firm by lowering the operation cost(lower labor cost in foreign countries) however it may reduce domestic employment rate.

Factors affecting International Trade Flows:

1) Cost of Labor: low labor cost has advantage in labor intensive industries
2) Inflation: current account decrease(exports fall, imports increase) if inflation is high
3) National Income:higher GDP,current account falls
4) Credit conditions: unfavorable conditions reduce international trade as MNCs reduce corporate spending and imported supplies
5) Government Policies: increase exports, and reduce imports.
1) Restriction on imports using tariffs and quotas.
2) Subsidies for exporters: Help firms produce at a lower cost than global firms
3) Restrictions on Piracy: if no restrictions, discourages MNCs from exporting to that market
4) Environmental Restrictions: higher cost
5) Tax Breaks: benefit local firms
6) Exchange rates
 Balance of trade deficit enlarges if currency appreciates. Exchange rates may correct the deficit, by spending more on imports, it will place downward pressure on domestic currency. Results more foreign demand for
domestic goods.
 May not correct deficit if other factors such as the purchase of securities, offsets the effects of international trade.

Limitations of a Weak-home Currency Solution( a weak currency may not correct a balance of trade deficit).
1. Competition: Foreign firms may lower their prices to stay competitive
2. Impact of other currencies: a country need not weaken against all currencies, hence a balance of trade deficit with many countries will not solve all deficits.
3. Prearranged international Trade transactions: international transactions cannot be adjusted immediately due to contract( J-curve)
4. Intracompany Trade: Trades between parent and subsidiaries

Factors affecting DFI

 Changes in Restrictions: New opportunities increase when government barriers were removed
 Privatization: DFI is stimulated by new business opportunities associated with privatization, private managers are more motivated to ensure profitability, creating a more competitive global marketplace.
 Potential Economic Growth: attract more DFI
 Tax Rates: low tax attract DFI
 Exchange Rates: pursue DFI in countries where currency is expected to strengthen against their own

Factors affecting Intl Portfolio Investment

Tax rates on Interest/Dividends: lower tax, higher potential after-tax earnings from investment
Interest Rates: higher interest rates
Exchange Rates: attract to currency expected to strengthen

Impact of International Capital Flows

More capital, both domestic and foreign, in the market will lower the equilibrium interest rate, this results in lower cost of capital, and more business opportunities.

Class 3- International financial market

Financial exchange Market

Ask rate−Bid rate

Bid/ask spread: ¿
Ask rate
Factors that affect the Bid/Ask Spread:
1) Order Cost: processing orders
2) Inventory Cost: holding an inventory of a currency involves an opportunity cost because the funds could have been invested. If i/r is high, cost is high.
3) Competition: more intense, spread smaller
4) Volume: Larger trading volume are liquid hence lower spread, price would not change abruptly
5) Currency Risk: More volatile, higher spread.

Exchange Rate Quotations

Direct Quotations: value of foreign currency in dollars ( eg, 1.4 USD per Euro)
Cross Exchange Rates: euro per sgd

International Money Market (short-term financing)

 Firms borrow in a currency in which the interest rate is lower/expected to depreciate
 When economic condition weakens, the corporate need for liquidity declines, reduce short-term funds to borrow, hence the money market i/r declines.
Risk of international Money Market securities:
1) Default risk especially from MNCs
2) Exchange rate risk

International Credit Market

Obtain medium-term funds through issuance of notes
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International Bond Market

1) Attract stronger demand by issuing in foreign markets
2) Finance a foreign project with the foreign currency in the bond market
3) Lower interest rate in foreign market

Eurobonds: bonds that are sold in countries other than the country whose currency is used to denominate the bonds.

Risk of International Bonds:

1) Interest Rate risk: bonds’ value decline in response to rising long-term interest rates
2) Exchange rate risk: affect bond’s value
3) Liquidity risk: sell at discount if illiquid
4) Credit risk: potential for default

International Stock Markets

Long-term financing for MNCs
Class 4-Exchange Rate

Exchange rate determination Direct spot rate(USD per pound).

Benchmark Currency
Fluctuating Currency
Factors that influence exchange rates: e=f (∆ INF , ∆∫ , ∆ INC , ∆ GC , ∆ exp)
Arbitrage
Covered interest arbitrage: process of capitalizing on the difference in interest rates between 2 countries while covering your exchange rate risk with a forward contract. Market realignment: downward pressure on the forward
rate ( fr has a discount from the Spot rate=i/r advantage)

1+i h
Interest Rate Parity(IRP)- In equilibrium, the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between 2 currencies. Forward premium, P= −1
1+i f
Points representing IRP: covered interest arbitrage impossible. Points below IRP: should engage covered interest arbitrage; upward pressure -spot rate & downward pressure-forward rate. Points above IRP: investors receive

lower return on foreign than domestic investment; covered interest arbitrage is feasible from perspective of foreign investors. p ≈ i h−i f
Purchasing Power Parity(PPP)-difference in inflation rates shifts exchange rate.consumers shift dd to wherever prices are lower. Prices of the same basket of products in 2 different countries should be equal.

e f ≈ I h−I f The foreign currency should fluctuate by same degree as inflation differential. PP disparity-home country consumer’s PP for foreign goods has increased/decreased relative to their PP for domestic
goods=take advantage of disparity&down/upward pressure on foreign currency’s value. The shift in trade continues until a new equilibrium is reached in which the lvl of depreciation/appreciation offsets the inflation
differential PPP limitation: Results vary from the base period used(should reflect an equilibrium position) and other country characteristics can affect exchange rate movements.
International Fisher Effect(IFE):difference in i/r shifts exchange rates. High i/r;strong dd for local currency;appreciate. Step 1: apply fisher effect to estimate difference in expected inflation (

Inflation=I nominal −I real) for each country; assume Real i/r same for both, diff inflation=diff Nominal i/r. Step 2: rely on PPP to estimate the diff in expected inflation will affect exchange rate.
1+i h
ef = −1, i h <i f then e f will be positive
1+ i f
Points below IFE line: reflect higher returns from investing in foreign deposits. Points above IFE line: reflect higher returns from investing in domestic deposits. (All will refute the IFE theory) Limitation of IFE: expected
inflation rate computed from real&norminal i/r is subjected to error.

Class 6-Currency Derivatives:

Forward contract: an agreement between a firm and a bank to exchange currency at a specific forward rate and future date to hedge exposure to exchange rate risk.
Offsetting a forward contract: offset the initial obligation (forward purchase) with another forward contract/ fee
Using forward contracts for swap transactions: involves a spot transaction along with a corresponding forward contract that will ultimately reverse the spot transaction (eg lending money). Receive fewer dollars in future if
the forward rate exhibits a discount.
Non-Deliverable Forward Contracts with a bank (NDF) common for emerging currencies; less liquid: normal forward contract with no actual exchange of currencies. Eg( MNC takes a sell position in an NDF and uses the
closing exchange rate of that currency as the reference index=>receive a payment in dollars from the ND to offset any depreciation in the currency)
Currency future market: traded by speculators who hope to capitalize on their expectations of exchange rate movements.
Buyer (seller) of future contract: receive foreign (home) currency.

How to use currency futures:

Purchasing futures to hedge payables: locks in the price at which a firm can purchase a currency (paying imports)
Selling futures to hedge receivables: locks in the price at which a firm can sell a currency (when exports are paid for in a currency that a firm won’t need, US firm accepting pounds, eg change pounds back to USD) Expects
the foreign currency to depreciate
Closing out a Future position: contract to buy and then sell future contracts before settlement date to incur gain or loss
Speculation with Currency future: expect pound to appreciate, buy future contract and sell pound at spot rate at settlement OR Sold by speculators who expect that the spot rate of a currency will be less than the future’s
rate (contract to sell, buy at spot, sell at settlement)

Currency Options Market: provides the right to buy/sell currencies at exercise prices(X) before expiry date. Call (BUY). Put (SELL).

Factors affecting currency call option premiums(C): C=f(S-X,T,σ) In the money: S>X.
 Spot Price relative to exercise price: Higher the S relative to X, high premium, greater probability of buying the currency at a lower rate than at what you can sell it.
 Length of time before the expiration date: Longer period= spot rate is more likely to raise above exercise price.
 Volatility of currency: Greater variability, greater likelihood of spot rate rising above exercise price.

Usage of Currency Call options (hedge the US firm against possible appreciation of foreign currency):
1. Hedge payables: Specifies max price firm has to pay to obtain foreign currency to pay foreign imports if an order cancelled, a firm has the flexibility to let the option expire and need to fulfil any obligation in a forward
contract.
2. Hedge Project bidding: bid a foreign project at a fixed price of foreign currency
3. Hedge target bidding: hedge a possible acquisition(see above)

Speculating with Currency Call Options:

Buy call option: Expect foreign currency to appreciate will purchase call options on that currency=> if appreciate, buy at X and sell it at S.
Sell call option: expect foreign currency will depreciate, so as to at least earn the premium of the call option
Breakeven: Spot rate= strike price + option premium

Currency Put Options: provides right to sell a currency at exercise price(X) before expiry date. In the money: S<X.

Factors affecting Currency Put option premiums(P): P=f(S-X,T,σ)

 Spot Price relative to exercise price: lower the S relative to X, the higher the premium, as there’s higher chance that the option will be exercised.
 Length of time until expiration: Longer=higher premium.
 Volatility of currency: greater variability=higher premium
Hedging with Currency Put Options: cover open positions
Speculating with Currency Put Options

Buy put option: Expect foreign currency to depreciate will buy put options on that currency=> if depreciate, buy at S, sell at X
Sell put option: expect foreign currency appreciate, so as to at least earn the premium of the call option

Conditional Currency Options

Currency option with a conditional premium. Eg, Conditional Put option; spot rate below strike price=> exercised with no premium, but if spot rate above trigger price=> must pay premium.

Forward vs Currency Options contracts:

Forward:
Advantages:
 Protected against any adverse movements in the exchange rate.
 Can set budgets knowing exactly how much the transaction costs.
Disadvantages
 Obligated to go ahead with the contract once it is arranged, regardless of whether any circumstances changes.
 Because the rate is fixed, one can't benefit from any favourable movement in the exchange rate.
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Options:
Advantages
 Protected against any adverse movements in the exchange rate
 Business can benefit if the exchange rate moves in your favour.
Disadvantages
 The expense of setting the option up.
 Only available to companies with large foreign exchange exposures

Class 7-Exposure Management

Measuring exposure to exchange rate fluctuations
1.Transaction exposure:
Sensitivity of firm’s contractual transactions in foreign currencies to exchange rate movements
1) Estimate net cash inflow/outflow in each currency
2) Develop a range of exchange rate for each currency
3) Exposure of MNC’s portfolio:

σ p=√ (W 2x σ 2X +W 2y σ 2Y +2 W X W y σ x σ y COR Rxy )

Transaction Exposure based on Value at Risk: maximum possible loss on value of positions held by an MNC that is exposed to exchange rate movements.

Maximum 1day loss ( % )=E ( e t ) −( 1.65∗σ x )

Factors affecting VaR:
1) Expected percentage change in currency rate for the next day
2) Confidence level(95%=1.65,97.5%=1.96)
3) Standard deviation
 If currencies are less volatile, the range of possible future exchange rate outcomes is narrower; less chance of extreme exchange rate movements that could cause a major loss.
 The max loss for portfolio of currency will be lower than that for individual currencies because of the diversification effects due to the non-perfect correlation of the currencies.
Limitations of VaR
 If the distribution of exchange rate movements is not normal, the estimate of the max expected loss will be subjected to error
 Assumes that the volatility (stand dev) of exchange rate movements is stable over time. If exchange rate movements are less volatile in the past, the loss will be underestimated

2.Economic Exposure
The sensitivity of firm’s cash flows to exchange rate movements which may not be subjected to contractual transactions.
Exposure to local currency appreciation:
 Cash inflows from exports denominated in local currency will likely be reduced as foreign importers pay with weaker foreign currency
 Cash outflows: cost of import denominated in foreign currency will be reduced.
 Reduction in both cash inflows and outflows. The impact of net cash flows will depend on whether transactions are affected more or less than the outflow transactions

Exposure to local currency depreciation:

 Causes an increase in both cash inflows and outflows
 Local sales and exports will increase due to reduced foreign competition and increase in foreign demand
 More cash outflows as more of the weakened currency is need to obtain the foreign currency

Economic Exposure of Domestic firm:

A domestic firm’s net cash flow will be affected from the changes of local currency due to foreign competition(eg. local consumers import instead)

Measuring Economic Exposure:

Using Sensitivity Analysis:
 Consider how sales and expense categories are affected by various exchange rate scenarios
 Firms with more in foreign costs than in foreign revenue will be unfavorably affected by a stronger foreign currency
Using Regression analysis:
Apply regression analysis to historical cash flow and exchange rate data.
If the coefficient is (+), an increase in currency value has favorable effect on firm’s cash flows.

3.Translation exposure:
Exposure of MNC’s consolidated financial statements to exchange rate fluctuations (translation of subsidiaries’ financial statements)
Determinants of Translation exposure:
 Proportion of business by foreign subsidiaries
 Location of foreign subsidiaries: volatility of subsidiaries trading currency
Exposure of MNC’s stock price to translation effects:
 Because MNC’s translation exposure affects its consolidated earnings, it can affect its valuation and stock price(industry P/E ratio * earnings)
 Managerial compensation also affected by translation effects since it is often tied to MNC’s stock price.

Class 8-Managing Transaction Exposure

1. Hedging most of the exposure: allows MNCs to more accurately forecast future cash flows( make better decisions in finance budgeting)
2. Selective hedging: MNC with well diversified transactions around the world may forgo hedging their exposure, this will limit the actual impact.

Hedging Exposure to Payables (insulate from appreciation)

1. Forward or Future hedge (buy payable/foreign currency forward)
2. Money market hedge:involves taking a money market position to cover a future payables position (borrow $, convert to €, invest in €, repay in $ in one year)
 Borrow funds in home currency
 Invest in foreign currency
 If IRP holds, money market hedge will yield same results as forward hedge.
3. Currency option hedge (evaluate based on estimated cash outflows)
 MNC has the flexibility to let the option expire(no obligation)
 Cost of hedging includes price paid for the currency and the premium for the call option
Optimal hedging technique varies over time, depending forward rate, interest rate, call option premium and forecast of future spot rate

RC H p=Cost of hedging payables−Cost of payablesif not hedged

Hedging Exposure to Receivables (insulate from depreciation)
1) Forward/Future Hedge(Sell receivables/foreign currency forward)
2) Money market Hedge(borrow €, convert to $, invest in $, return in €)
3) Put Option Hedge (evaluate based on estimated cash inflows)
Total Cash received includes cost of premium and cash received

Limitations of Hedging
1) Limitation of hedging an uncertain payment
International transactions that involve an uncertain amount of foreign currency, leading to overhedging, leading to unnecessary risk
2) Limitation of Repeated Short-term Hedging
This has limited effectiveness in the long run.
3) Long term Hedging as a solution: more effect when MNC has long-term contract that guarantees long term transaction exposure.

Managing Economic Exposure

Assessing economic exposure
MNC must measure its exposure to each currency in terms of its cash inflow and outflows
Restructuring to reduce economic exposure
Restructuring involves shifting the sources of costs or revenue to other locations in order to match cash inflows and outflows. (reduce cost of capital, improve cash flow, increase in its value)
Strategies to hedge economic exposure
1) Pricing policy: charge higher price(high cash inflows when foreign currency is strong to offset the low cash flows(lower price) when foreign currency is weak.
2) Hedging with forward contracts:not a long term solution as future revenues are hard to predict
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3) Purchasing foreign supplies: offset the adverse effect of fluctuation in foreign currency of cash inflows, but it may increase operating expenses(transportation expense)
4) Financing with foreign funds
5) Revising operations of other units
Limitations of the Hedging strategies:
The impact of foreign currency movement on firm’s outflows is known with certainty but impact on cash inflows is uncertain

Hedging exposure to fixed assets

 Selling foreign currency forward in long-term forward contract
 Create a liability in that foreign currency that matches the expected value of the assets in the future
Limitations of hedging the sale of fixed assets:
MNC don’t know the date and price it will sell the assets.

Managing Translation Exposure-Hedging with Forward Contracts

Limitations of hedging Translation Exposure
 Inaccurate Earnings Forecasts: subsidiary earnings are uncertain

Class 9- International Capital Budgeting

Subsidiary vs parent perspective
 Tax differentials
Tax treatment for remittance to parent company by parent’s government. If the domestic tax rate is high, the project may not be feasible from parent’s point of view
 Restrictions on remitted earnings
Host government may impose restrictions on remitted earnings by subsidiaries.
 Exchange rate movements
Earnings converted to currency of the parent company will be affected by exchange rate movements.

Input for Multinational Capital Budgeting

Initial investment (initial cash outflow and working capital)
Price & consumer demand ( future inflation rates )
Costs: variable costs can be developed from comparative costs of the components (eg, labor costs, material) / fixed costs (eg, lease/rents)
Tax law, remitted funds, exchange rates, salvage value, Projects’ required rate of return/ discount rate (depends on the cost of capital and risk of project): must fully account for the project’s risk

Other factor to consider

Exchange rate fluctuations, Hedged exchange rate(hedge some of its expected cash flows)
Inflation fluctuations; affect both costs & revenues.
Effects of inflation & exchange rate maybe partially offsetting( currency of highly inflated countries tend to depreciate over time, PPP)
Blocked funds: retained earnings in subsidiaries are reinvested locally.

Break even salvage value

Effect on prevailing cash flow for parent company
Host Government incentives

Financing arrangements:
Subsidiary Financing vs Parent financing
Subsidiary financing is more feasible than complete parent financing because financing rate on loan is lower than parent’s require rate of return and reduce exposure to change rate movements

However parent financing is better as there will not be interest expense and greater gain in salvage value, the cash flows received by the parent are more susceptible to exchange rate movements since they are larger.

Real Options

Adjusting project assessment for risk

Risk-adjusted discount rate:
The greater the uncertainty about a project’s forecasted cash flows the larger should be the discount rate
Cash flows are less certain in the distant future than near future, different discount rate should be applied

Sensitivity to variables: exchange rate/demand

Simulation: distribution of NPV

Class 10 Long term debt financing

Financing to match inflow currency
Financing operations(issue bonds, borrow from banks) with the currency in which they invoice products, this matching strategy will reduce the subsidiary’s exposure to exchange rate movements.
 Using currency swaps to execute matching strategy
Engage in currency swap; allow MNC’s cash outflows to be denominated in the same currency as its revenue

 Using Parallel loans to execute matching strategy

Involves two parent companies taking loans from their respective national financial institutions and then lending the resulting funds to the other company's subsidiary
1.Debt Denomination decision by subsidiaries
Cost of debt=interest rate of host country
Debt decision in host countries(developing) with high interest rates
Countries with high interest rates=have high expected inflation
 Not wise to finance with home currency, foreign subsidiary will periodically remit larger amount of foreign currency to repay parent company loan & exposed to exchange rate risk
Combining Debt Financing with Forward Hedging
 Subsidiary will not benefit from forward hedging as the interest rate parity will cause the forward rate of foreign currency to exhibit discount/premium which will be offset by the interest rate difference.
Comparing Financing costs between debt denomination(host/home)
 Only finance subsidiary with home denominated debt if one is confident that foreign currency won’t depreciate more than forecast

2. Debt denomination to finance projects

 Apply capital budgeting analysis to each financing mix to determine which financing mix will result in a higher NPV
3. Debt Maturity Decision
Assessment of Yield curve (relationship between annualized yield and debt maturity, higher required rate of return on long-term debt)
Financing costs of loans with different maturities
 If yield curve is upward-sloping, could finance with debt with shorter maturity to achieve lower cost of debt financing. However, might incur higher financing costs with additional funding after the existing loan matures
4. Fixed vs Floating rate debt decision
 Coupon rate/ interest rate fluctuate according to market interest rates (LIBOR). An advantage when interest rate is decreasing
 Have to forecast LIBOR to estimate annualized cost of financing
 Hedge the risk of rising interest rates with interest rate swaps
Vanilla Swap: Party with floating interest payments, swap with party with fixed payments and find the net payment.
 Limitations of interest rate swaps: (1) cost of time & resources to search for suitable swap candidate (2) counterparty default risk

Class 11- Short term financing

Internal short-term financing

 Financing temporary shortage of funds using subsidiaries excess funds
 Should recognize which subsidiaries have cash available in the same currency that another subsidiary needs to borrow
 There should be internal control that consistently monitors the amount of short-term financing by all subsidiaries and impose maximum short-term debt level at each subsidiary.

External short-term financing

Short term notes: maturity of less than 6 months and based on LIBOR
Commercial Paper: MNCs offering commercial papers
Bank loans: maintain credit arrangements with various banks

Financing with a foreign currency:

 MNCs usually borrow the currency that matches their future cash inflows to hedge its receivables against exchange rate risk, this strategy is especially appealing if the interest rate of the foreign currency is lower

 Interest rates in developing countries are usually higher than that in developed countries; developing countries tend to higher inflation and lower level of saving that reduces money supply

Determining the effective financing rate

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Actual cost of financing affect by:

 The interest rate of the loan
 The exchange rate of borrowed currency over the life of the loan
Effective financing rate:

r f =( 1+i f ) 1+ [ ( St +1−S
S
−1 )]
Criteria when deciding which Currency to borrow at:
a) Interest rate parity

r f =( 1+i f ) [ 1+ p ]−1
1. Borrow foreign currency and convert to home currency for use
2. Purchase foreign currency forward to lock in the exchange rate need to pay off the loan
3. Feasible only when the foreign interest rate is low
4. If interest rate parity holds, the foreign currency will exhibit a forward premium that offsets the interest differential ( the effective financing rate will be similar to the domestic interest rate)
b) Forward rate as a forecast

r f =( 1+i f ) 1+
[ ( )] F−S
S
−1
If future spot rate of foreign currency is lower than the forward rate: the effect financing rate will be less than the domestic interest rate
c) Exchange rate forecast

r f =( 1+i f ) [ 1+ e f ] −1
When effective rate=domestic rate r =I
f h
Forecast for the foreign currency exchange rate’s percentage change over the financing period

Financing with a portfolio of foreign currencies

To achieve lower financing costs without excessive risk
Analysis of financing with 2 foreign currencies
1. Find the possible joint effective financing rates
2. Computation of joint probability
3. Computation of effective financing rate of portfolio

 The only way the currency portfolio will exhibit a higher effective financing rate than the domestic rate is if all currencies experience their maximum possible level of appreciation ( assuming that the 2 currencies have strong
positive correlation)
 Lower correlation, lower portfolio variance and lower risk/volatility

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