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Questions: Devil Corporation is a U.S.-based company that produces high-definition DVD players. Three years ago, this firm established a production facility in the United Kingdom, because it sells DVD players there. Devil has excess capacity there and will use that facility to produce the DVD players for the Singapore market. The DVD players will be sold to distributors in Singapore and invoiced in Singapore dollars . If the exporting program proves successful, Devil will probably build a facility in Singapore, but it plans to wait at least years before it takes that step.
Prior to this exporting program, Devil Corporation decided to develop a hedging strategy to hedge any cash flows from its subsidiaries. It plans to issue bonds to finance the entire investment in the exporting program. Virtually all expenses associated with this program are denominated in pounds, yet the revenue generated by the program is denominated in Singapore dollars. Any revenue above and beyond expenses will be remitted to the United States on an annual basis. Aside from the exporting program, the British subsidiary will generate just enough in cash flows to cover expenses, so it will not be remitting any earnings to the parent. Devil is considering three different ways to finance the program for years:
1. Describe the exchange rate risk if Devil finances with Singapore dollars.2. Describe the exchange rate risk if Devil finances with British pounds.3. Describe the exchange rate risk if Devil finances with U.S. dollars.
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