This report is created with a discussion over several important international finance topics for instance, interest-rate parity, currency risk management, regarding description on Carrefour S.A. financing policies as well as hedging strategy. Additionally, we also discussed on which currency Carrefour should issue its 10-year, 750 million euro, annual coupon bond, its foreign currency risk exposure and a possible hedging decision in dealing with any or all of the identified risks.
Summary of the Case Study
This case is related to Carrefour S.A. planning to finance its growth by issuing debt securities and considering borrowing in British sterling in order to take …show more content…
Therefore, take into account the movement of each currency in the next 10 years is crucial not only the cost of capital.
Utilizing the Interest Rate Parity (IRP), we can find the forward rate of British Pound, Swiss Franc and U.S. Dollar in 10 years time while the Euro is our home country. Since we are given the coupon rate per annum, compute the compounded interest rate is necessary in our case.
As can be noticed, issuing 10-year bond in Switzerland seems to be the most appropriate country for Carrefour to rise their debt requirement of Euro 750,000,000. Interest Rate Parity may not sufficient for determining which country Carrefour should issue its bond, since tax implication, transaction cost as well as the political risk are differ across countries. Thus, knowing the approximate or the trend of each currency movement is wiser in order to make a decision.
The foreign currency risk exposure that the firm will faced is more likely Transaction Exposure. Transaction exposure is the effect of currency changes on foreign cash flow (balances) as well as near term contractual flows for instance Carrefour case is payable positions. As the company are considering to financed it growth using debt (bonds) they will experience a cash flow denominated in foreign currency as Carrefour is looking forward to issue bonds in foreign currency more over their