Chapter 20
Short-Term Financing
Lecture Outline
Sources of Foreign Financing
Internal Short-term Financing
External Short-term Financing
Access to Funding During the Credit Crisis
Financing with a Foreign Currency
Comparison of Interest Rates Among Currencies
Determining the Effective Financing Rate
Criteria Considered in the Financing Decision
Interest Rate Parity
The Forward Rate as a Forecast
Exchange Rate Forecasts
Actual Results from Foreign Financing
Financing with a Portfolio of Currencies
Portfolio Diversification Effects
Repeated Financing with a Currency Portfolio
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Short-Term Financing 2
Chapter Theme
This chapter explains short-term liability management of MNCs. From this chapter, students should learn
that correct financing decisions can reduce the firm’s costs. While foreign financing costs cannot usually
be perfectly forecasted, firms should evaluate the probability of reducing costs through foreign financing.
Topics to Stimulate Class Discussion
1. If a firm consistently exports to a country with low interest rates and needs to consistently borrow
funds, explain how it could coordinate its invoicing and financing to reduce its financing costs.
2. What is the risk of borrowing a low interest rate currency?
3. Assume that foreign currencies X, Y, and Z are highly correlated. If a firm diversifies its financing
among these three currencies, will it substantially reduce its exchange rate exposure (as opposed to
borrowing all funds from one of these foreign currencies)? Explain.
POINT/COUNTER-POINT:
Do MNCs Increase Their Risk When Borrowing Foreign Currencies?
POINT: Yes. MNCs should borrow the currency that matches their cash inflows. If they borrow a foreign
currency to finance business in a different currency, they are essentially speculating on the future
exchange rate movements. The results of this strategy are uncertain, which represents risk to the MNC
and its shareholders.
COUNTER-POINT: No. If MNCs expect that they can reduce the effective financing rate by borrowing a
foreign currency, they should consider borrowing that currency. This enables them to achieve lower costs,
and improves their ability to compete. If they take the most conservative approach by borrowing whatever
currency matches their inflows, they may incur higher costs, and have a greater chance of failure.
WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?
Offer your own opinion on this issue.
ANSWER: If MNCs borrow in a low interest rate currency that is not matched with their inflow
currencies, they may be able to reduce their effective financing rate. However, they increase their
exposure to exchange rate risk. Their decision is based on a tradeoff of expected reduction in financing
expenses versus the risk that the currency their borrow appreciates against their inflow currencies.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.