Chapter 14 ShortTerm Financing

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Chapter 14 Short-Term Financing
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Sources of short term financing

• Various methods of obtaining short term funds
• Euronotes and Euro-commercial paper
• Direct loans from Euro-banks

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Internal financing by MNCs

• MNC parents need funds internal sources of
  financing
• Some portions of funds come from money market
• Increase their markup on supplies they send to
  the subsidiaries

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Why MNCs consider foreign financing

• Foreign financing to offset foreign receivables
• Foreign financing to reduce costs
• Interest rates differ among currencies

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Determining the effective financing rate

• The actual cost of financing by the debtor firm
  will depend on (1)the interest rate charged by
  the bank that provide the loan(2)the movement in
  the borrowed currencys value over the life of
  loan
• Effective financing rate may differ from the
  quoted interest rate
• To compute the effective financing rate,first
  determine the amount in dollar beyond the amount
  borrowed that was paid back. Then divide by the
  number of dollars borrowed.

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Criteria considered for foreign financing(1)

• Interest rate parity
• If IRP exists, the attempt of covered interest
  arbitrage to finance with a low interest rate
  currency will result in an effective financing
  rate similar to the domestic rate
• The forward rate as a forecast
• When IRP exists, the forward rate can be used as
  a break even point to assess the financing
  decision.

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Criteria considered for foreign financing(2)

• Exchange rate forecasts
• Once the firm develops a forecast for the
  exchange rates percentage change over the
  financing period, it can use this forecast along
  with foreign interest rate to forecast the
  effective financing rate of a foreign currency
• The forecasted rate can then be compared to the
  domestic financing rate

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Mini case discussion

• Short term financing by the Sports Exports
  Company
• Page 443