Cuanto Corp. is a U.S. drug company that has attempted to capitalize on opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the costs in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Cuanto penetrated the Eastern European market by purchasing a 60 percent stake in Galena, a Czech firm that produces drugs.

a. What is the best strategy for Cuanto Corp. for avoiding exposure to exchange rate risk?

1. The Czech subsidiary of Cuanto should borrow koruna locally from a Czech bank and then make its interest payments before remitting any funds to the parent.
2. The Czech subsidiary of Cuanto should borrow koruna locally from a Czech bank and then make its interest payments after remitting any funds to the parent.
3. The Czech subsidiary of Cuanto should borrow dollars from a U.S. bank and then make its interest payments before remitting any funds to the parent.
4. The Czech subsidiary of Cuanto should borrow dollars from a U.S. bank and then make its interest payments after remitting any funds to the parent.

b. What is the best strategy for Cuanto Corp. for avoiding exposure to political risk?

1. The Czech subsidiary of Cuanto should borrow koruna locally from a Czech bank.
2. The Czech subsidiary of Cuanto should borrow dollars from a U.S. bank.
3. The Czech subsidiary of Cuanto should borrow Euros from a European bank that does rely on either dollars or Czech karuna.