Bond financing analysis. Hatton Ltd 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 pounds. The prevailing UK long-term interest rate is 9% versus 3% in Japan. Assume that interest rate parity exists, and that Hatton believes that the international Fisher effect holds.

a Should Hatton finance its production with yen and leave itself open to exchange rate risk?

Explain.

b Should Hatton finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk?

c How could Hatton plc achieve low-cost financing while eliminating its exposure to exchange rate risk?