International Financing Harvard Case Solution & Analysis

International Financing Case Solution

International Finance

Businesses borrow internationally as well as investors make foreign investments. The international finance is used by almost every large company and corporate organization. Governments and international organizations have several effects on the international financing.(Tomz, 2012) The policy that affects interest rates, exchange rates, and the global economic conditions place high risk in such financing options.

Spot rate transaction can be defined as on the spot ordinary transaction, where the transaction or deal is settled immediately. Spot transactions are also called cash transactions and the price paid under this transaction is the spot price (Forward Contracts and Forward Rates, n.d).

 Assume the U.S. one-year interest rate is 8%, and the British one-year interest rate is 6%. firm that takes out a one-year, uncovered British loan?

It is a question of international finance. The interest rate is 8% while the British one year interest rate is 6%. The forward rate is given but for this, calculation is not required, the beginning and ending spot rate of pound is given, which will be used to calculate the percentage change in pound. Effective rate of finance is to be calculated.

First of all, the percentage change in pound spot rate is calculated. For this the formula used is:

Change in Pound (%) = (Ending spot rate-initial spot rate)/ initial spot rate

Using this formula, the percentage change in spot rate is calculated. The initial spot rate is $1.95 and the ending spot rate is $2.05. Therefore, the percentage change in spot rate is calculated at 5.13%.  The effective financing rate is calculated using the formula:

Effective Financing Rate= (1+Change in Pound %) X (1+ British one year interest rate)-1

Using such formula, the effective financing rate is calculated and the effective financing rate for a U. S. firm that takes out a one-year, uncovered British loan is 11.44%.

Spot rate      
At beginning of the year  $       1.95
At end of the year  $       2.05
U.S one year Interest rate 8%
British one year interest rate 6%
One year Forward Rate  $       1.97
Change in Pound (%) 5.13%
Effective Financing Rate 11.44%

The effective financing rate has been increased due to the increase in spot rate. It is feasible that the company must lock the future exchange rate or else the investment will become risky for the company. A forward exchange contract can play a vital role here and might cover the risk of such change in exchange rates(The relationship between exchange rates, interest rates, n.d). In the forward contracts, the prices are ascertained ahead of time when the contracts are settled. Thus, in the forward contract the risk is mitigated, as compared to the spot rate transaction................

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