Bond Financing Analysis Hawaii Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in dollars. The prevailing U.S. long-term interest rate is 9 percent versus 3 percent in Japan. Assume that interest rate parity exists and that Hawaii Co. believes that the international Fisher effect holds. Should Hawaii Co. finance its production with yen and leave itself open to exchange rate risk? Explain. Should Hawaii Co. finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk? How could Hawaii Co. achieve low-cost financing while eliminating its exposure to exchange rate risk?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 18, Problem 10QA
Textbook Problem

Bond Financing Analysis Hawaii Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to finance the production of the products that it will export. The products will be denominated in dollars. The prevailing U.S. long-term interest rate is 9 percent versus 3 percent in Japan. Assume that interest rate parity exists and that Hawaii Co. believes that the international Fisher effect holds.

  1. Should Hawaii Co. finance its production with yen and leave itself open to exchange rate risk? Explain.
  2. Should Hawaii Co. finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk?
  3. How could Hawaii Co. achieve low-cost financing while eliminating its exposure to exchange rate risk?

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