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Transcript of Carrefour S.A.
Which debt issue do we recommend
What does interest parity says about international borrowing costs?
Equilibrium condition where in covered interest arbitrage will provide a return that is no higher that a domestic return
If a forward rate is higher than what IRP indicates, borrowing foreign is more cost effective that of home borrowings.
Carrefour S.A. looks for the best rate with less complications in the process, moreover given financial liberalization and resulting capital mobility, arbitrage temporarily becomes possible until equilibrium is restored.
What can a firm do to manage the exchange rate risk of foreign currency borrowing?
Why does the Eurobond market exist? Is plentiful debt capital not available domestically?
Eurobond is denominated in a currency not native to the country where it is issued
Can decrease risk by hedging against the currency borrowed with another currency
Among many features have very few covenants
Offer certain tax shelters and anonymity to their buyers
Favorable interest rates and international exchange rates
Because market conditions change all the time, the popularity of a particular currency in the Eurobond market changes over time
Assuming the bonds are issued at par, what is the cost in euros of each of the bond alternatives
Using the parity forward rates, what is the cost of borrowing in Swiss Francs? British pounds? And US dollars? What should Carrefour do?
Established 1 January 1958
Headquarters Boulogne Billancourt, France
Largest Retailer in Europe
Introduction of hypermarket concept all in one, supermarket, drugstore, discount store and gas station
from 1963 until 2001, expand thru all France and all Continents
Profits 2,8 billion on net sales from 69,5 billion in sales results from 2001
Coming from 2% South America 5% Asia 26% from Europe and the remainder from Operations in France
What is going on at Carrefour?
Grown in volume of sales and stores all over the world
They are financing their growth with Euros, the currency of its business operations
Carrefour S.A. is facing a moment where they can choose to invest in their growth in a different way
French retail giant Carrefour S.A. was considering alternative currencies for raising (euro) EUR750 million in the Eurobond market
There are four choices of bond market, British pounds, Swiss frank, U.S. dollars and Euros
Total Cost in Euros
US Dollar 1.157.422.301€
Sterling Pound 1.487.326.644€
Frank Swiss 1.005.758.037€
Risk Free Rates by Currency Denomination
Which debt issue would you recommend?
Assuming Interest Rate Parity holds Assuming Interest Rate Parity holds until the moment of the first semester of 2002, the Carrefour S.A. should issue debit in Swiss Franc because is most cheap therefore the most effective to use for the borrowing they need to expand
To illustrate which market is more competitive, cost of issue (both money and time), tax implications, and arbitrage opportunity are factors that should be evaluated
Techniques to eliminate transaction exposure
Futures hedge - Lock in the future exchange rate at which an MNC can buy or sell a currency
Forward hedge - Same as futures contract but to large amounts
Money market hedge - Reversing foreign currency receivable/payable by creating matching payable/receivable through borrowing in the money markets
Currency option hedge - A firm pay a premium to guarantee the exchange rate in the future its up to the company to decide
Hedging long-term transaction exposure
Long-term forward contract
Currency swap - Two firms have different long-term needs. One firm that needs a currency and another firms that want to sell in the same currency
Carrefour`s growth had occurred almost entirely outside France and included several large acquisitions
Carrefour was profitable in all major operating regions
The company expect to maintain its expansion trajectory
Foreign-currency exposure on imported goods was generally hedged through currency-forward contracts
Carrefour`s debt denominated in many currencies
Foreign-currency borrowing was generally hedged so that total debt requirements were currently 97% in Euros
Carrefour`s management want growth
Managing Transaction Exposure - A firm are affected by exchange rate fluctuations, how Carrefour can minimize those fluctuations rates to get better performance
They`ll need financial instruments, with a debt-financing requirement of EUR 750 million (what best currency option?)
1st Identify the degree of transaction exposure
2nd Decide whether to hedge this exposure
3th Decide to hedge part or all of the exposure
On the road of Carrefour...
Operational Techniques for Managing Transaction Exposure:
Leading and Lagging
There is home currency available domestically, but in the long run the home currency is depreciating and Carrefour doesn't want to loose money with the borrowing, which means does not want to pay more than expected in the initial spot rate
Carrefour S.A. management has to look for the lowest interest rate available at the moment of borrowing and expect and predict that the currency used won't appreciate too much on a level that becomes a disadvantage
Kamila Raksimowicz ID23239
Magdalena Ziółkowska ID23710
Rafael Lourinho ID 27716
Vinicius Gomes Appolinario ID 27701
What about the case...