H Sdn. Bhd. recognizes that its year-to-year hedging strategy hedges the risk only over a given year and does not insulate it from long-term trends in the Canadian dollar’s value. It has considered establishing a subsidiary in Canada. The goods would be sent from Malaysia to the Canadian subsidiary and distributed by the subsidiary. The proceed received would be reinvested by the Canadian subsidiary in Canada. In this way, LH Sdn. Bhd. would not have to convert Canadian dollars to Ringgit each year. Has LH Sdn. Bhd. eliminated its exposure to exchange rate risk by using this strategy? Explain.

H Sdn. Bhd. recognizes that its year-to-year hedging strategy hedges the risk only over a given year and does not insulate it from long-term trends in the Canadian dollar’s value. It has considered establishing a subsidiary in Canada. The goods would be sent from Malaysia to the Canadian subsidiary and distributed by the subsidiary. The proceed received would be reinvested by the Canadian subsidiary in Canada. In this way, LH Sdn. Bhd. would not have to convert Canadian dollars to Ringgit each year. Has LH Sdn. Bhd. eliminated its exposure to exchange rate risk by using this strategy? Explain.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter17: Multinational Capital Structure And Cost Of Capital

Section: Chapter Questions

Problem 19QA

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