Question 1.

A U.S. drug company, Ivax, is planning 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 of those in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Ivax penetrated Eastern Europe by purchasing a 60 percent stake in Galena AS, a Czech firm that produces drugs.

a) Do you think it would be better for Ivax to finance its investment in the Czech firm by borrowing dollars from a U.S. bank which would then be converted into koruna (the Czech currency) or by borrowing koruna from a local Czech bank? What information do you need 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?

Question 2.

How an MNC based in the USA may be able to offset a portion of its exchange rate risk by issuing bonds denominated in euros?

Question 3.

California Rice, Inc. (CRI), a U.S. exporter of agriculture products to Japan, denominates its exports in dollars and has no other international business. It can borrow dollars at 9 percent to finance its operations or borrow yen at 3 percent. If it borrows yen, it will be exposed to exchange rate risk. How can CRI borrow yen and possibly reduce its economic exposure to exchange rate risk?