RELATIONSHIP BETWEEN THE MARKET DEVIATION FROM THE INTEREST RATE PARITY AND THE NET WORKING CAPITAL DECISION OF THE U.S. MULTINATIONAL CORPORATIONS

Minje Jung
University of Central Oklahoma
ABSTRACT
The purpose of this study is to examine how foreign exchange markets and money
markets affect foreign currency denominated working capital management of U.S. multinational
corporations. The Interest Rate Parity (IRP) theory is explained and two major hedging
techniques (forward hedge and money market hedge) are prescribed under the two different
market conditions of deviation from the IRP. Calculations that measure conformation/deviation
to/from the IRP relationship are performed and tests for significance are executed for two
currencies € and £.
The findings suggest that these international financial markets did not conform to IRP
during the periods examined, and hedging would have been appropriate. Some deviations were
significant, and the directions of the deviations varied among currencies. The author investigates
how market deviation from the IRP and ensuing choice of hedging technique result in change in
net working capital of multinational corporations.