Devil Corporation is a U.S.-based company that produces high-definition DVD players. Three years ago, this firm established
Question:
Prior to this exporting program, Devil Corporation decided to develop a hedging strategy to hedge any cash flows from its subsidiaries. It plans to issue bonds to finance the entire investment in the exporting program. Virtually all expenses associated with this program are denominated in pounds, yet the revenue generated by the program is denominated in Singapore dollars. Any revenue above and beyond expenses will be remitted to the United States on an annual basis. Aside from the exporting program, the British subsidiary will generate just enough in cash flows to cover expenses, so it will not be remitting any earnings to the parent. Devil is considering three different ways to finance the program for years:
- Issue-year, Singapore dollar-denominated bonds at par value;.
- Issue-year, pound-denominated bonds at par value;.
- Issue-year, U.S. dollar-denominated bonds at par value;.
- Describe the exchange rate risk if Devil finances with Singapore dollars.
- Describe the exchange rate risk if Devil finances with British pounds.
- Describe the exchange rate risk if Devil finances with U.S. dollars.
Financial Accounting Tools for Business Decision Making
ISBN: 978-0470239803
5th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso