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Huaneng Power International is a large Chinese company that runs coal-fired power plants in five...

Question:

Huaneng Power International is a large Chinese company that runs coal-fired power plants in five provinces and in Shanghai. It has close to {eq}\$1.2 {/eq} billion in U.S. dollar debt whose proceeds it has used to purchase equipment abroad.

A) What currency risks does Huaneng face?

B) Do its lenders face any currency risks? Explain.

FX Risk:

This question relates to foreign exchange (FX) risk, which is exposure to financial loss due to currency fluctuations. Also referred to as currency risk, FX risk is comprised of transaction risk, translation risk, and economic risk.

Answer and Explanation:

Part A)

Huaneng is exposed to transaction risk and economic risk. The transaction risk exists because Huaneng is a Chinese company that has issued debt denominated in U.S. dollars. If the dollar strengthens relative to the yen (China's currency), repaying the debt will become more difficult for Huaneng. The economic risk exists because of Huaneng purchases equipment abroad. Long-term shifts in the value of the yen relative to the currencies used in the countries from which it sources equipment could lead to adverse economic outcomes for the company.

Part B)

If Huaneng's lenders are U.S. based, they would not be exposed to any currency risk associated with the loans. Since the loans have been denominated in U.S. dollars, the interest and principal will be repaid in their home currency. That said, if the lenders are based in a third country, they could be exposed to transaction risk.


Learn more about this topic:

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Investment Risks: Definition & Types

from Finance 305: Risk Management

Chapter 3 / Lesson 3
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