Article Review
Executive summary
Since the 2008 recession—when financial instability resulted in the losses and insolvency of several banks and firms—there is an increased cautiousness about international investments and lending experiences in not just the emerging-market countries, but in any foreign soil. This article discusses the use of bonds by firms investing in international markets to avoid the adversities caused by exchange-rate fluctuations. While foreign-exchange risk is still being hedged by currency swaps and futures contracts, bonds in the local currency are being used increasingly by investing companies. They use the cash flow generated from the sales in the country of investment to pay the interest on the bonds. In this manner, companies or their affiliates are avoiding the micro and macro implications of exchange rate changes from affecting their core business.
Discussion and analysis
While globalization has opened trade boundaries for companies, it has also brought in several challenges. One of these challenges is to the currency appreciation versus depreciation risk posed when the market of the country in which a firm invests is bullish or otherwise. Moreover, translation exposure, which is the divergence from exposed assets to exposed liabilities can also give rise to gains or losses, as all foreign currency assets as well as liabilities are bound to undergo exposure when they are translated at the existing exchange rate. The prime economic milieu of the country of investment and the country’s currency, in which buying negotiations and sales invoices are made, can affect the financial status of the country, and issuing bonds in the investing country’s currency is an excellent scheme for hedging a company against losses incurred from such operations.
As the article suggests, companies have realized this fact and have been using bonds in the investing country’s currency. This is also ensuring a connection between “the value of profits from abroad and the value of the interest payments they make there,” thus assuring a harmony in the currencies’ movements irrespective of the volatility of markets. Initially, to hedge a foreign currency’s exposure, investing companies used strategies like shorting the currency, and thus, necessitating the buying of a forward contract from its bank. Nowadays, bonds have become trendy as they seem to hedge a company best against market volatility. Moreover, a bank is able to create a forward contract only if could can borrow in the currency of the foreign currency in question and then, use the investing company’s home currency to proceed spot contracts and then, invest.
In the bond market, the investing party takes due consideration of the low nominal interest rates in the investing country before investing. Thus, in markets like China, with the opening of the trade boundaries, the government has allowed foreign companies to issue debt. Another benefit in issuing bonds in a foreign country is that the country does not have to have subsidiaries in the country. This and the expected rise in the value of the Yuan, has caused companies with subsidiaries to rush forward with bond issues in an attempt to safeguard themselves. The article is in favor of the trend of issuing foreign-currency-denominated bonds as it believes that, while big companies are the only ones issuing bond today, their presence in foreign soil would open the path for small companies. This paper agrees with this point of view, and sees this as globalization in its very essence.
