AireAsia, headquartered in Kunming, China, needs US$5,000,000 for one year to finance working capital (assume annual compounding). The airline has two alternatives for borrowing: Borrow US$5,000,000 in Eurodollars in London at 2.50% per annum Borrow HK$38,750,000 in Hong Kong at 4.00% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.75/US$ for U.S. dollars. At what ending exchange rate would AireAsia be indifferent between borrowing U. S. dollars and borrowing Hong Kong dollars?

Q: Vijay

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.