Essay 2: What are the relative merit of the following ways to hedge FX risk: options, forward contracts and money market hedges?
Be specific, avoid being too general
Just trying to be specific to explain a case. Don’t be too general.
fx risk is foreign exchange risk
Answer preview
Company B, with a higher proportion of debt, has the lowest value of WACC while company A with a higher proportion of equity has a higher WACC. Company C, with an equal proportion of equity and debt, has an intermediary value. The debt is thus a less risky investment since the interest is tax-deductible. Equity and debt present different implications in taxation. However, since a company use different kinds of debt, there are different tax implications and deductibility. The tax thus influences how debts and equity are used relative to each other. According to Miller and Modigliani theory, the tax advantage is the most critical factor that favors consideration of debt over equity; otherwise, the value would be the same (Lumen, n.d.).
