A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business and needs a small loan. The firm could best reduce its exposure to exchange rate risk by borrowing:

Question

​A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business and needs a small loan. The firm could best reduce its exposure to exchange rate risk by borrowing:

Quizplus · Accepted Answer

If the firm were to borrow in U.S. dollars, it would have to convert the borrowed amount into Canadian dollars, which could expose the firm to exchange rate risk if the currency were to fluctuate unfavorably. Borrowing in Canadian dollars would eliminate this risk as the firm's earnings and expenses are already in Canadian dollars. Borrowing in Chinese yuan would expose the firm to exchange rate risk as it would have to convert the borrowed amount into Canadian dollars. Borrowing in a combination of Canadian dollars and Chinese yuan would still expose the firm to exchange rate risk as the borrowed funds would need to be converted into either currency at some point.

​A US Firm Has a Canadian Subsidiary That Remits a Large

A US Firm Has a Canadian Subsidiary That Remits a Large