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International Finance Decision

Page history last edited by PBworks 15 years, 8 months ago

 

Question:

 

If you could get a loan for 3% interest per year denominated in Swiss Franc's, or a loan for 5.25% denominated in US dollars, which would you choose?  Your first instinct is to choose the 3%, because you will owe less interest.  But which is a better deal depends upon the forward exchange rate that you can get. 

 

 

 

Cheaper to borrow in Europe:

 

Borrowing money in Europe (using Eurobonds) will normally be cheaper than borrowing money in the US.  A Eurobond will be cheaper than a Euro-loan.... this means that borrowing money in European markets is typically cheaper than borrowing money in the US, but be aware of the forward exchange rate before doing so. 

 

  • Eurobond market is not regulated like US market  (making Eurobonds cheaper)
  • no reserve requirement for banks
  • this implies a slightly higher risk for Eurobonds, but there is a good reputation of Banks issuing (trust is there)
  • always cheaper to borrow in Europe

 

EuroBond vs. EuroLoan

 

  • loans are cheaper than bonds (for borrowing money)
  • but, bond locks in a rate for many years
  • loan must be re-negotiated each term
  • so, typically good idea to pick a bond, because fixed.
  • Or, you can speculate and go with a loan
  • loans will be considerably cheaper, but have liquidity risk for company because need to re-negotiate each year (you might not get same deal ever again!).

 

 

To Eliminate currency Risk

 

  • get a Eurobonds denominated in USD
  • cheaper than bond in USA, and has no Currency risk

 

 

 

Risk Management

 

 

 

 

Links

 

International Money issues

foreign currency trading

Eurobonds

Eurocurrency

Foreign bonds

International Finance Decision

 Wikipedia article

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