Why do all currency bonds "expose the issuers and the holders to some form of foreign exchange risk" regardless of the category of bond?
What will be an ideal response?
Foreign exchange risk refers to the risk associated with receiving cash flows in another country's currency. From the perspective of the holder of a currency bond (the investor), the cash flows denominated in a foreign currency expose the investor to uncertainty as to the cash flow to be received in their country's currency. This is because the cash flow they actually receive depends on the exchange rate between their country's currency and the foreign currency received. If the foreign currency depreciates (declines in value) relative to their country's currency, then they will receive proportionately less. From the issuer's view, they are at risk since expected depreciation may make their bonds less marketable driving down the price.
Dual-currency issues are issues that pay coupon interest in one currency but pay the principal in a different currency. This can expose both the issuer and the holders to foreign exchange risk if both the cash flows paid (by the issuer) and the cash flows received (by the holder) are not known in advance. The exact exposure can depend on the type of dual-currency bond. For a first type of dual-currency bond, the exchange rate that is used to convert the principal and coupon payments into a specific currency is specified at the time the bond is issued. A second type differs from the first in that the applicable exchange rate is the rate that prevails at the time
a cash flow is made (i.e., at the spot exchange rate at the time a payment is made). A third type is one that offers to either the investor or the issuer the choice of currency. These bonds are commonly referred to as option currency bonds.
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