Question
Impact of derivatives on the design of global capital structure
Answer :
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Derivatives play a significant role in shaping the global capital structure of multinational corporations. By providing tools to manage financial risks such as currency fluctuations, interest rate volatility, and commodity price changes, derivatives allow firms to optimize their debt and equity mix more efficiently. Currency derivatives, for instance, enable firms operating across multiple countries to hedge foreign exchange risk, thereby stabilizing expected cash flows and reducing the likelihood of financial distress. This risk mitigation often encourages firms to take on higher leverage since the potential adverse effects of currency and interest rate movements are controlled. Interest rate derivatives, including swaps and
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