Textbook Problem

Financing and Exchange Rate Risk Vix Co. (a U.S firm) presently serves as a distributor of products: It purchases these products from other U.S. firms and sells them in Europe. Vix Co. wants to acquire 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), and 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 eight years. Thus, it will need to borrow funds for an eight-year term to ensure that it has enough funds to pay all of its operating expenses in Thailand. The company 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.