# International Finance Chapter 18 Addendum: Financing and Investing Short Term

 Sana 12.09.2017 Hajmi 459 b.

• ## 1) Borrowing short-term funds. Firms will enter international money markets to finance cash shortfalls.

• When obligations associated with current (and due) liabilities exceeds cash and marketable securities, the firm will consider borrowing short term.
• ## 2) Investing short-term funds. Firms will enter the international money markets to earn interest on “excess” funds.

• When cash held exceeds current (and due) liabilities, the firm will look to place funds in short-term international money market instruments.

• ## 2) The (anticipated) change in the exchange rate during the period that the funds will be borrowed.

• Prior to paying back the borrowed funds.
• This needs to be considered because the firm has an exposed foreign currency position or the period up to repayment.

• ## Why?

• It will take more home currency to pay off the debt. Thus,
• Effective borrowing cost = market interest rate + foreign currency appreciation.

• ## Why?

• It will take less home currency to pay off the debt. Thus,
• Effective borrowing cost = market interest rate – foreign currency depreciation.

• ## Rf = (1 + if)(1 + ef) – 1

• Where:
• Rf = is the effective financing rate.
• if = is the market interest rate.
• ef = is the expected (percentage) change in the foreign currency against the firm’s home currency.

• ## Calculate the expected change in the Swiss franc:

• Expected change = (forecast - current)/current), or
• (\$.55 - .50)/.50 = .05/.50 = .10 (10.0%), then
• ## Using the effective rate formula:

• Rf = (1 + if)(1 + ef) - 1

• ## Calculate the expected change in the Swiss franc:

• Expected change = (forecast - current)/current), or
• (\$.49 - .50)/.50 = -0.1/.50 = -0.2 (-2.0%)
• ## Using the effective rate formula:

• Rf = (1 + if)(1 + ef) - 1

• ## Question?

• What if we elect to cover the exposure associated with the borrowing?

• ## Reason: A discount on the foreign currency means it will take less of your home currency to pay the liability and a premium means it will take more.

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