Do MNCs Increase Their Risk When Borrowing Foreign Currencies?
Point Yes. MNCs should borrow the currency that matches their cash inflows. If they borrow a foreign currency to finance business in a different currency, they are essentially speculating on the future exchange rate movements. The results of the strategy are uncertain, which represents risk to the MNC and its shareholders.
Counter-Point No. If MNCs expect that they can reduce the effective financing rate by borrowing a foreign currency, they should consider borrowing that currency. This enables them to achieve lower costs and improves their ability to compete. If they take the most conservative approach by borrowing whatever currency matches their inflows, they may incur higher costs and have a greater chance of failure.
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