A U.S.firm has a Canadian subsidiary that remits some of its earnings to the parent on an annual basis. The firm has no other foreign business. The firm could best reduce its exposure to exchange rate risk by issuing bonds denominated in:

Question

A U.S.firm has a Canadian subsidiary that remits some of its earnings to the parent on an annual basis.  The firm has no other foreign business.  The firm could best reduce its exposure to exchange rate risk by issuing bonds denominated in:

Quizplus · Accepted Answer

If the U.S. firm issues bonds denominated in Canadian dollars, it can match the earnings remitted by its Canadian subsidiary with the interest payments on these bonds. This will reduce its exposure to exchange rate risk, as it will not have to convert the remitted earnings from Canadian dollars to U.S. dollars. Issuing bonds in multiple currencies or a unit of account such as the SDR would not offer the same level of matching and therefore would not be as effective in reducing exchange rate risk. Issuing bonds in U.S. dollars would also expose the firm to exchange rate risk.

A USFirm Has a Canadian Subsidiary That Remits Some of Its