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The CFO of a Korean company is reviewing the company’s financial. The company would like to...

The CFO of a Korean company is reviewing the company’s financial. The company would like to increase its overseas sales and plans a significant expansion of its manufacturing facilities. This expansion will require capital raising either through the issuance of debt or equity. Why might the CFO consider issuing debt or equity in a foreign currency?

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Answer #1

One of the fundamental principal of capital budgeting is to match the currency of the revenue to the currency of the debt or equity. This important to avoid currency mismatch between the assets and liabilities. If there is a currency mismatch, then the company is exposed to foreign exchange risk.

Suppose a company has its sales in the U.S. and it has taken debt in Korea. The debt has to be serviced in KRW, but the revenue is being generating in U.S. dollars. So, the company has to convert U.S. dollars every month to service the debt in KRW. The company incurs a significant loss if the U.S. dollar depreciates significantly against the KRW. It is exposed to forex risk! In order to avoid this risk, it has to match its sales currency with the debt/equity currency.

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