Financing and Exchange Rate Risk Vix Co. (a U.S firm) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Europe. It wants to purchase a manufacturer in Thailand that could produce similar products at a low cost (due to low labor costs in Thailand) and export the products to Europe. The operating expenses would be denominated in Thai currency (the baht). The products would be invoiced in euros. If Vix Co. can acquire a manufacturer, it will discontinue its existing distributor business. If Vix Co. purchases a company in Thailand, it expects that its revenue might not be sufficient to cover its operating expenses during the first 8 years. It will need to borrow funds for an 8-year term to ensure that it has enough funds to pay all of its operating expenses in Thailand. It can borrow funds denominated in U.S. dollars, in Thai baht, or in euros. Assuming that its financing decision will be primarily intended to minimize its exposure to exchange rate risk, which currency should it borrow? Briefly explain.
Financing and Exchange Rate Risk Vix Co. (a U.S firm) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Europe. It wants to purchase a manufacturer in Thailand that could produce similar products at a low cost (due to low labor costs in Thailand) and export the products to Europe. The operating expenses would be denominated in Thai currency (the baht). The products would be invoiced in euros. If Vix Co. can acquire a manufacturer, it will discontinue its existing distributor business. If Vix Co. purchases a company in Thailand, it expects that its revenue might not be sufficient to cover its operating expenses during the first 8 years. It will need to borrow funds for an 8-year term to ensure that it has enough funds to pay all of its operating expenses in Thailand. It can borrow funds denominated in U.S. dollars, in Thai baht, or in euros. Assuming that its financing decision will be primarily intended to minimize its exposure to exchange rate risk, which currency should it borrow? Briefly explain.
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