Question

Which of the following is a viable strategy for a firm to lower its cost of...

Which of the following is a viable strategy for a firm to lower its cost of capital?

a. Other things equal, borrow funds in a currency that is expected to depreciate against the firm's home currency.

b. Other things equal, borrow funds in a currency that is expected to appreciate against the firm's home currency.

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Answer #1

A viable strategy for a firm to lower it's cost of capital should borrow funds in a currency that is expected to appreciate against the firm's home currency. Hence, the company should borrow funds which is expected to appreciate against the firm's home currency. For example, if 1 USD is equal to 75 INR earlier and now is equal to 78 INR, the home currency has appreciated against the currency we took the loan and gained value lowering it's cost of capital.

Hence, the answer is option b.

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