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Hi, Mr Moffat
If interest rates rise substantially for a longer duration and even the company does not trade Internationally. It can manage by taking a loan in a different currency or eurocurrency
What if the local currency devalues but company has no international links. No imports no exports. Would there be any economic risk in terms of foreign exchange rate ?
Yes, of course there will be risk.
Not only the amount owing, but the interest payable each year will be in the foreign currency and therefore be at risk.
That is why it is not something the financial manager should normally consider – their job is to minimise risk and therefore only to do things like this in order to hedge against the risk attaching to other foreign receipts or payments (just as the whole point of financial managers using derivatives is to use one risk to ‘cancel out’ another risk, as I explain in my lectures).
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