Background

U.S. Semiconductor, a semiconductor manufacturer decided to expand their business to UK market in 1980. Their new business plan needed specialized technical support facility in UK. In order to minimize the equity investment, they decided to fund their assets mostly with debt. As Semiconductor owned subsidiaries, which spread all over the world, they face great exchange risk. Besides, instead of building a production department in UK, Semiconductor kept producing their products domestically and delivered them to UK by plane. British firms also confronted exchange risk due to the difference between import costs and sales revenues. This case mainly involves the discussion on the method of debt funding.

Discussion

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Moreover, the depreciation of the sterling does not mean that USD will appreciated compared with pound sterling. The saying about profit center is not supported by strong practical evidence. At the same time, borrowing in UK should consider the politic risk, which is unpredictable. Without any hedge strategies, this would be like a big gamble, causing great deal of risks.

4. Apart from the two main points mentioned above, there is a third opinion--funding debt half in dollars and half in sterling, which proposed by others on the finance staff. They argued that this compromise method was more appropriate because exchange risk was unpredictable in the long run. They also suggested that shipments should be hedged by 3-month US dollars forward.

This method sounds like diversification to me at first, but after further thinking, this still not that appropriate. Undoubtedly, this method costs most among these strategies because it makes company to deal with commercial banks in two different countries. Meanwhile, diversification is a good way to avoid risk but simply divided debt into 50-to-50 lacks proper and specific analysis.

5. The controller's group suggested outside accountants to treat all the assets of US Semiconductor Ltd. As de facto, a concept provided by new accounting standard 52.

This argument depends exchange rate on historical data, which can not be applied in efficient market. Although the market