What would you tell your client about the foreign exchange risk?
It looks like the foreign exchange risk is extremely important and it is a factor that people need to decide when they are considering exchanging currencies for business purposes. Say, one of your Australian corporate clients has borrowed in USD, and wants you to explain how his business might be affected if the AUD weakens against the USD.
What would you tell him?
Hmm… your answer does not answer the question.
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Borrowing in a foreign currency is a way of hedging. Your client may already know more than you on currency risk and is seeking to manage it by borrowing the USD assuming it will go lower when he pays the loan back.
Hedging cuts both ways. He can also lose, but he may have already taken that into account in his pricing.