Production with yen-leave itself open to exchange rate risk

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Long term debt financing. Oregon Co. just agreed to a long-term deal in which it will export products to Japan. It needs to finance the production of the products it will export. The products will be denominated in dollars. The prevailing long-term interest rate is 5 percent versus 3 percent in Japan. Assume that interest rate parity exists and that Oregon Co. believes that the International Fisher effect holds.

a) Should Oregon Co. finance its production with yen and leave itself open to exchange rate risk? explain.

b) Should Oregon Co. finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk? explain

c) How could Oregon Co. achieve low-cost financing while eliminating its exposure to exchange rate risk? explain.

Reference no: EM131871305

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