In a world with market imperfections, it may be possible for an issuer to reduce its borrowing cost by borrowing funds denominated in a foreign currency and hedging the associated exchange rate risk, also known as an arbitrage opportunity.

Question

Quizplus · Accepted Answer

It is possible for an issuer to benefit from borrowing in a foreign currency if there are market imperfections that lead to a cost advantage. By hedging the associated exchange rate risk, the issuer can further lower its borrowing cost and potentially create an arbitrage opportunity. However, this strategy also carries risks and may not always be profitable.

In a World with Market Imperfections, It May Be Possible