Cuanto Corp. is a U.S. drug company that has attempted to capitalize on new opportunities to expand in Eastern Europe. The production costs in most Eastern European countries are very low, often less than one-fourth of the cost in Germany or Switzerland. Furthermore, there is a strong demand for drugs in Eastern Europe. Cuanto penetrated Eastern Europe by purchasing a 60 percent stake in Galena AS, a Czech firm that produces drugs.
a. Should Cuanto finance its investment in the Czech firm by borrowing dollars from a U.S. bank that would then be converted into koruna (the Czech currency) or by borrowing koruna from a local Czech bank? What information do you need to know to answer this question?
b. How can borrowing koruna locally from a Czech bank reduce the exposure of Cuanto to exchange rate risk?
c. How can borrowing koruna locally from a Czech bank reduce the exposure of Cuanto to political risk caused by government regulations?
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