Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate without exchange rate risk by denominating thebonds in

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By denominating the bonds in euros and making payments from the German subsidiary, the U.S. firm avoids exchange rate risk because the payments are made in the same currency in which the bond is denominated. Additionally, the firm can take advantage of the lower German interest rates, reducing financing costs. If the firm were to denominate in dollars, they would still face exchange rate risk, and if they were to make payments from their U.S. headquarters or German subsidiary in either currency, they would still face currency conversion costs which could offset any potential savings from the interest rate difference.

Assume US Interest Rates Are Significantly Higher Than German Rates