I think it's a silly answer but before I say why I think so, here is the examiner's reasoning. My rant follows after.
If you expect the local currency to weaken, you could temporarily invest in foreign currency. When your currency falls, you can sell the foreign currency to make a (currency) profit.
If your goal is to capitalise on this profit, you may invest in foreign money market intruments.
Other asset classes are volatile, and may move in such a way to negate the currency effect. They may not however.
So the core reading says that expectations of a weakening local currency makes foreign cash (in the sense of money market investments) attractive.
If expectations of weakening currency makes foreign cash attractive, strenghtening of the currency should make foreign cash unattractive.
That's the reasoning behind the examiners solution.
I (personally) don't quite agree with it because it just highlights how dependant we are on lists for exams (despite being a supposedly application subject). Firstly, the above example is a very specific example. Attractiveness isn't binary (black and white) where something is attractive or not, it is a wide spectrum, so I feel "not (very) attractive" doesnt necessarily mean (flat out) unattractive.
By similar reasoning on an equally specific hypothetical situation, strengthening of local currency implies global relative (average) weakening of foreign currencies. They will be inclined to invest in the cash of strenghtening curencies actually making local cash attractive.
So currency considerations wouldn't be at the top of a list for reasons making cash (in general) unattractive (unless of course your knowledge primarily relates to core reading lists rather than application of concepts).
Last edited by a moderator: Apr 7, 2009