Question 4 (20 marks)

(a)An MNC is considering to raise financing in Malaysia or Australia. If the MNC were to minimise the cost of financing, where should it raise its financing? Assume that the MNC would issue shares and bonds in Malaysia or Australia. Explain your recommendation.

(b)If interest rate parity holds, what would happen to the forward rates when the foreign currency money market offers a higher return than the domestic money market? What would happen if the adjustment does not take place? Explain your answer

(c)What are the advantages and disadvantages of using options contracts relative to forward contracts to hedge against transaction exposure? Which contract would you use for committed transactions? How about for anticipated transaction? Explain your answer.