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A US MNC desires to finance a capital expenditure...

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A US MNC desires to finance a capital expenditure of its German subsidiary. The project has an economic life of five years. A German MNC of equivalent creditworthiness desires to finance a capital expenditure of its US subsidiary. The project has an economic life of five years. Both MNCs want the equivalent of $52,000,000 in fixed-rate financing for five years. The current spot exchange rate is $1.30/1.00 (euro) US MNC can issue dollar denominated debt at a coupon rate of 8% or euro-denominated debt at a coupon rate of 7% German MNC can issue dollar-denominated debt at a coupon rate of 9% or euro-denominated debt at a coupon rate of 6%. (Assume a swap bank is not involved for the questions following) 1. Please indicate currency and amount needed by each MNC. 2. Please explain risks faced by each MNC in connection with desired financing. 3. Please develop a hedging strategy (other than futures, forwards, and options) for each MNC. 4. Please indicate amount of annual interest payments each MNC will make and receive for the next five years. 5. Please indicate principal payments each MBC will make at the end of year 5. 6. Please explain how each MNC benefitted from your hedging strategy (indicate amunt saved and risks managed) 7. If a swap bank charges US MNC 6.1% and German MNC 8.15% for services in connection with the currency swap, and MNCs external borrowing cost remains the same, please indicate the following: a. Amount of profit realized by swap bank b. Whether it is still beneficial for MNCs to enter into currency swap (ie indicate net reduced cost or net additional cost).

 

Paper#7249 | Written in 18-Jul-2015

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