Financing decision. Ivax plc (based in Germany) is a drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the cost in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Ivax penetrated Eastern Europe by purchasing a 60%

stake in Galena AS, a Czech firm that produces drugs.

a Should Ivax finance its investment in the Czech firm by borrowing euros that would then be converted into koruna (the Czech currency) or by borrowing koruna from a local Czech bank?

What information do you need to know to answer this question?

b How can borrowing koruna locally from a Czech bank reduce the exposure of Ivax to exchange rate risk?

c How can borrowing koruna locally from a Czech bank reduce the exposure of Ivax to political risk caused by government regulations?