Consider the following statements about overseas borrowings

1. When there is interest-rate disparity between the domestic and foreign markets, it becomes costlier to service loans in overseas.
2. If the domestic currency were to decline compared with the foreign currency, the company is liable to pay more than it had bargained for in real terms.

Select the correct statement.

Overseas Borrowings

• The argument behind borrowing in foreign currencies is that when there is interest-rate disparity between the domestic and foreign markets (favouring the latter), it becomes cheaper to service such loans.
• It is crucial to note the borrower is still open to exchange risk, notwithstanding the difference in interest to be paid.
• If the domestic currency were to decline compared with the foreign currency, the company is liable to pay more than it had bargained for in real terms.
• A revenue earned in foreign currencies may not be a sufficient hedge for companies borrowing excessively due to low-interest rates.
• The problem with borrowing in the current environment is the impending risk of a recession due to increased interest rates to curb inflation. 

Hence only statement 2nd is correct. 

By: Shubham Tiwari