Question

Why did so many East Asian companies and banks borrow dollars, yen, and Deutsche marksinstead of their local currencies to finance their operations? What risks were they exposingthemselves to?

Answer 1

1) Lower interest rate

2) Devaluation of Local Currency Risk

Step-by-step explanation:

1) The main reason why so many East Asian companies and banks borrow dollars, yen, and Deutsche marks instead of their local currencies to finance their operations is that the loans/finance obtained in the local currencies (from local financial institutions i.e. commercial banks, etc) carry a higher interest rate making the debt more costly than the foreign currency debt.

2) The major risk those companies are exposing themselves to is the devaluation risk of their respective local currencies against the foreign currencies, which eventually makes the foreign currency loans higher in terms of payment in the local currency.