Western Gas Limited just agreed to a long-term deal in which it will export natural gas to Japan. It needs funds to finance the production of the natural gas that it will export. The export will be denominated in Australian dollars. The prevailing Australian long-term interest rate is 6 per cent versus 3 per cent in Japan. Assume that interest rate parity exists, and that Western Gas Limited believes that the International Fisher effect holds.

1. Should Western Gas Limited finance its production with yen and leave itself open to the exchange rate risk? Explain.
2. Should Western Gas Limited finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk?