3. The Union Computer Export Company continues to focus on producing computers in the US and exporting them to

the United Kingdom. The exports are denominated in sterling, which continually exposed the firm to exchange rate risk.

It is now considering a new form of expansion where it would sell specialty computers in the US.

If it pursues this US project, it will need to borrow long-term funds.

The dollar denominated debt has an interest rate that is slightly lower than the sterling denominated debt.

• John Johnson, owner of the company, needs to determine whether dollar denominated debt or sterling denominated

debt would be most appropriate for financing this expansion, if he does expand. He is leaning toward financing the US project

with dollar denominated debt since his goal is to avoid exchange rate risk.

Is there any reason why he should consider using sterling denominated debt to reduce exchange rate risk?

• Assume that John decides to finance his proposed US business with dollar denominated debt, if he does implement the project.

How could he use a currency swap along with the debt to reduce the firm's exposure to exchange rate risk?

4. Assume Nikkem Microsystems has sold Internet Servers to Telecom Espania for 700,000 euros.

Payment is due in 3 months and will be made with trade acceptance from Telecom Espania Acceptance.

The acceptance fee is 1.0 % per annum of the face amount of the note. This acceptance will be sold at 4% per annum.

What is the annualized percentage all-in cost in euros of this method of trade financing?