Question

What are two exchange rate effects on Investing and Borrowing internationally and why? Briefly discuss

Answer 1

INVESTING: If the foreign currency appreicates it means one is able to take larger US dollars to US [i.e., a company purchased foreign currency to make investment at lower exchange rate than rate at which company will convert foreign currency to U.S. dollars]when the investment period is over. Hence, one gains when foreing currency appreicates and loses when foreing currency depreciates.

BORROWING: If foreign currency appreicates one has to pay larger US dollars to cover the same liability [i.e., company converted foreign currency to U.S. dollars at lower exchange rate compared to rate at which company will have to pay at the time cmpany would repay the loan] and hence loses when foreign currency appreciates and gains when foreing currency depreciates.

answered by: anonymous