Textbook Problem

Cleveland, Inc., plans to finance its U.S. operations by borrowing two currencies with low interest rates whose exchange rate movements are highly correlated. The movements in the two currencies against the dollar are highly correlated. Although the company recognizes that each currency could potentially appreciate substantially against the dollar over the period in which it borrows funds, it is hoping that by diversifying between two currencies, it will not be adversely affected by possible exchange rate movements. Offer your opinion of Cleveland’s strategy and logic.