A NZ firm needs to borrow NZD 10 million for one year. It can borrow at a

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Question:

A NZ firm needs to borrow NZD 10 million for one year. It can borrow at a local bank at 6% per annum or it can issue bonds in Singapore denominated in Singapore dollars at 7% per annum. The current spot rate of Singapore dollar is S$ 0.94 per NZ$ and the forecasted exchange rate in one year is S$ 0.97 per NZ$.

(a) Is it cheaper for the NZ firm to borrow in New Zealand or Singapore? Show your calculations to justify the answer.

(b) What is the additional risk(s) involved in borrowing in Singapore? How could the NZ firm mitigate this risk(s) if it decides to borrow in Singapore