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ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions

A group wants to raise long-term funds for a subsidiary in an emerging market with a restricted currency and volatile inflation. Which approach is most consistent with managing political and currency risk through financing?

Raising a high proportion of funding locally in the host currency is most consistent with managing the risks. It matches liabilities to local revenues and makes government interference less likely, particularly where local banks or development finance institutions are involved. Unhedged parent-currency funding leaves a currency mismatch.

  1. ARaise a high proportion of the funding locally in the host currency, including from local banks or development finance institutionsCorrect
  2. BFund wholly through intra-group sterling loans repayable on demand to extract cash quickly
  3. CUse only short-term parent equity injections that are not hedged
  4. DIssue long-term fixed-rate debt in the parent's currency and keep it unhedged

Explanation

Local-currency borrowing creates a natural hedge and involvement of local banks or development institutions reduces the risk of expropriation or blocked funds. Parent-currency debt leaves a mismatch with local revenues. Demand loans and unhedged parent funding do not mitigate the risk.

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