Introduction to Corporate Finance

PART 5: SPECIAL TOPICS

TABLE 17.5 KEYBRIDGE CAPITAL LTD’S CURRENCY EXPOSURES AS AT 31 DECEMBER 2011

Currency Assets Liabilities Net

US dollar 54 million 44 million 10 million

Australian dollar 28 million 1 million 27 million

Euro 6 million 0 6 million

Source: Keybridge Capital Limited December 2011 Half Year Results, http://www.keybridge.com.au/MediaReleases/120214.php.

CFO SURVEY EVIDENCE

In a survey of CFOs from four European countries,

Brounen, de Jong and Koedijk asked companies

whether they had considered issuing debt in a

foreign currency, and if so, what factors influenced

that decision. A company that earns revenues

in a foreign currency can offset some of that risk

exposure by generating costs in the same currency,

and one way to do that is by borrowing money in the

foreign currency.

Apparently, the hedging motivation for issuing

foreign debt is important to some companies,

especially those in the UK and the US (the US

figures come from Graham and Harvey, 2001).

More than 90% of British CFOs, and almost as

many American CFOs, said that ‘providing a natural

hedge’ was always or almost always an important

factor in their decision to issue debt in a foreign

currency. In contrast, CFOs from the Netherlands

and Germany put less emphasis on the hedging

motive, saying instead that they considered issuing

foreign debt because foreign interest rates may be

lower than domestic rates.

What factors influence the decision to issue foreign debt?

0

10

20

30

40

50

60

70

80

90

100

United Kingdom Netherlands Germany France United States

Percent of CFOs indicating factor is important

Provides a natural hedge Foreign interest rate lower

than domestic rate

Source: Reprinted from Dirk Brounen, Abe de Jong and Kees Koedjik, ‘Capital Structure Policies in Europe: Survey Evidence,’ Journal of Banking and Finance, 30,

pp. 1409–42, copyright 2006, with permission from Elsevier.

finance in practice

Beth Acton, Vice President

and Treasurer of Ford

Motor Co. (former)

‘When we look at

hedging of foreign

exchange exposures, we

make an assessment

of what kinds of risks

we want to take in the

business, and we are

not out to second-guess

the market.’

See the entire interview on

the CourseMate website.

COURSEMATE
SMART VIDEO

Source: Cengage Learning