Question Details

How could Hawaii Co. achieve low-cost financing 



1. Bond Financing Analysis. Hawaii Co. just agreed to a long-term deal in which it will export
products to Japan. It needs funds to finance 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. finance its production with yen and leave itself open to the exchange rate
risk? Explain.
b. Should Hawaii Co. finance 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?




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