Bond Financing Analysis
Response to the following problem:
Hawaii Co. just agreed to a long-term deal in which it will export products to Japan. It needs funds to ?nance the production of the products that it will export. The products will be denominated in dollars. The prevailing U.S. long-term interest rate is 9 percent versus 3 percent in Japan. Assume that interest rate parity exists and that Hawaii Co. believes that the international Fisher effect holds.
a. Should Hawaii Co. ?nance its production with yen and leave itself open to exchange rate risk? Explain.
b. Should Hawaii Co. ?nance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk?
c. How could Hawaii Co. achieve low-cost financing while eliminating its exposure to exchange rate risk?