Question

1. Exchange rate effects a. Explain the difference in the cost of financing with foreign currencies...

1. Exchange rate effects

a. Explain the difference in the cost of financing with foreign currencies during a strong Australian dollar period versus a weak Australian dollar period for an Australian company.

b. Explain how an Australian-based MNC issuing bonds denominated in Malaysian ringgit may be able to offset a portion of its exchange rate risk.

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Answer #1

Answer a) For Australian companies making investment in foreign currencies is always create dilemma of effective interest rate due to change in exchange rate of home currency.

The cost of financing would be cheaper for home company at time of strong Australian dollar period , as less Australian dollar  is required to purchase a given amount of foreign currencies.

While at weak Australia dollar period will increase the net cost of buying foreign currency .

Answer b) An Australian-based MNC issuing bonds denominated in Malaysian ringgit can be able to offset a portion of its exchange rate risk by use of all ,one or many techniques mentioned below .

  • By use of Forward Contract  
  • Swap of cash flow in two currencies
  • Parallel Loan of equivalent cash flow
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