International Finance Assignment | Exchange Rate Risk
Added on -2020-06-06
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INTERNATIONAL FINANCE
TABLE OF CONTENTS(1).....................................................................................................................................................1(2).....................................................................................................................................................1(3).....................................................................................................................................................1(4).....................................................................................................................................................1(5).....................................................................................................................................................2(6).....................................................................................................................................................2(7).....................................................................................................................................................3REFERENCES................................................................................................................................4
(1)Firm is exposed to exchange rate risk because as per scenerio investment is planned to bemade in China and due to high interest rate loan will be taken from Australia bank. On receipt ofamount in Australia Dollar its conversion need to be made in Chinese Yuan (Zhao, 2010). Thus,change in exchange rate between Australian Dollar and Chinese Yuan will directly eitherincrease value or decrease same of money that is going to be invested in Chinese market. Thus,exchange rate have direct impact on debt finance.(2)Capital budgeting can be used for comparison and under this two projects can beprepared one Australia based and one China based. Assumption will be made that after earningof revenue in China same will be bring back to Australia. In case of Australia based projectinterest rate of debt taken from Australia will be taken in to account as discount rate. Cash flowswill be estimated in Australia currency. On other hand, in case of Chinese project relevantamount of debt assumed to be taken from China and relevant interest rate will be used todiscount cash flows. Apart from this, cash flows expected to be received from China will beconverted into Australia Dollar (Diebold, 2012). On cash flows project evaluatation method willbe applied and impact on exchange rate on cash flows and viability of project will be measured.(3)Consultant is not correct because cost of equity is always higher then cost of debt. This isbecause dividend on per unit of equity is paid which cumulatively become higher amount. Onother hand, cost of debt interest is certain percentage which may be 8% which is charged on debtamount (Verdelhan, 2010). It can be said that cost of debt remain low. So in no situation thatstrategy can be beneficial if target is cost control. (4)In case amount is borrowed from Australia then firm is exposed to exchange rate risk.This is because loan taken need to be converted in to Chinese Yuan (Berman, Martin and Mayer,2012). However, if debt taken in Chinese Yuan then in that case exchange rate risk will not be inbusiness because debt will be taken from China and will be invested in same nation. 1 | P a g e
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