In case of international capital budgeting, long-term exchange rate risk can be minimized by financing the project, in whole or in part, in local currency.

Question

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Financing a project in local currency can help to minimize the risk of fluctuations in exchange rates, as the cash flows generated by the project will be in the same currency as the financing. This can help to avoid the potential losses that could result from converting cash flows back into the investor's home currency at an unfavorable exchange rate. However, it is important to note that this strategy may not completely eliminate exchange rate risk, as factors such as inflation and interest rates can still impact currency values over the long term.

In Case of International Capital Budgeting, Long-Term Exchange Rate Risk