Assume that hurricane, Inc is a US company tat exports products to the united ki
ID: 2670673 • Letter: A
Question
Assume that hurricane, Inc is a US company tat exports products to the united kingdom, invoiced in dollars. It also exports products to Denmark, invoiced in dollars. It currently has no cash outflows in foreign currencies and it plans to issue bonds in the near future. Hurricane could likely issue bonds at par value (1) dollars with coupon rate of 12% (2) Danish kroner with a coupon rate of 9% or (3) pounds with a coupon rate of 15%. It expects the kroner to strengthen over time. How could hurricane revise its invoicing policy and make its denomination decision to achieve low financing costs without excessive exposure to exchange rate fluctuations?Explanation / Answer
Hurricane could invoice goods exported to Denmark in kroner instead of dollars. Thus, it would now have inflows in kroner that could be used to make coupon payments on bonds denominated in kroner that it could issue.This strategy achieves a cost of financing of 9 percent, which is lower than the cost of other financing alternatives.To the extent that the inflows in kroner can cover bond payments, this strategy is not exposed to exchange rate risk. god bless.