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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