EBK FUNDAMENTALS OF CORPORATE FINANCE
EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 22, Problem 12QP
Summary Introduction

To discuss: Whether the risk could be eliminated by making an entry into a contract that is with a forward exchange and can still make money.

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1.) Assume your U.S. firm currently has a profit center in Malaysia, receiving a significant number of Malaysian Ringgit (MYR) every year. This is the only direct exchange rate exposure you currently have You want to borrow money to operations in Malaysia and would like to do it in a way that will help minimize your exchange rate risk (transaction risk). Which currency should you borrow: USD; MYR; JPY (Japanese Yen)? Explain how that helps minimize your transaction risk.
Imagine an American MNC. Why it might decide to borrow in a country such as Brazil, where interest rates are high, rather than a country like Germany, where interest rates are low? Discuss why this may be the best strategy for the firm, given your understanding of the relationship between inflation, interest rates, and exchange rate.
In the following cases, state which type of exchange rate risk the company is facing and wheter this risk is beneficial or harmful in nature. A British power-generating company imports coal from Germany, paying for the coal in euros. The company expects the pound to weaken against the euro over the next year. A UK toy company supplies only the domestic market. Its only major competitor in this market if a US toy company. The pound is expected to weaken against the dollar over the next year. A UK company has bought a factory in France, financing the purchase with a sterling borrowing. Over the next year the pound is expected to appreciate against the euro.
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