Explain two factors that lead MNCs to have a greater cost of capital relative to the domestic companies. Explain two factors that lead MNCs to have smaller cost of capital relative to the domestic companies:

b) Assume that the interest rate parity holds. What would happen to the spot and forward rate if the foreign money market offers a greater return than the domestic money market? Explain the outcome of engaging in the covered interest arbitrage for home investors.

c) Suppose a Malaysian MNC purchases raw materials from Australia and hedges the AUD payable using a forward contract. Given this decision, answer the following questions.

Explain the two situations that can lead the company to overhedge its AUD payable?

What are the consequences of overhedging for the company?

How can the company avoid this situation?

Answer rating: 100% (QA)

b Factors leading to greater cost of capital for MNCs relative to domestic companies 1 Foreign exchange risk MNCs operate in multiple countries and are exposed to currency fluctuations This introduces ... View the full answer