International Finance Ass.

Gretz Tool Company: Gretz Tool Tool Company is a large large U.S based Multinational Multinational Corporation Corporation with subsidiaries subsidiaries in eight differ different ent countr countries ies.. The parent parent of Gretz Gretz provid provided ed initi initial al cash cash infusi infusion on to establ establish ish each each subsidiary subsidiary.. However each subsidiary subsidiary has had to finance finance its own growth growth since then. The parent and subsidiaries of Gretz typically use Citicrop !the largest ban" in the United States with  branches in numerous countries# when possible to facilitate any flow of funds necessary. necessary. a. $%plai $%plain n the variou variouss ways in which which Citicro Citicrop p could could facilita facilitate te Gretz& Gretz&ss flow of funds and identify the type of financial mar"et where that flow of funds occurs. 'or each type of  financing transaction specify whether Citicrop would serve as the creditor or would simply be facilitating the flow of funds to Gretz.  b. (ecently the )ritish subsidiary called on Citicrop for a medium*term loan and was offered the following alternatives+

Loan Denominated Annualized Rate In. British Pounds

13%

U.S Dollars

11%

Canadian Dollars

10%

 apanese !en !en

8%

,hat characteristics do you thin" would help the )ritish subsidiary determine which currency to  borrow- ou ou can consider current '/($0 spot rate rate also.

Answer A. 1 1.1. Since the Gretz Tool Company is having its subsidiaries in other countries as well and

therefore in case one of its subsidiaries is willing to invest in the 'oreign T*bills thus the Citi )an" can help it out in providing the facility of 'oreign currency swapping. 1.2. )ased on the annual cash flow pro1ection of the Gretz Tool Company in case it feels that

it needs around 2*3 Million in cash for the upcoming year and beside this it also feels that the value of 2 will appreciate in the future it may sign a 'orward Contract with the Citi )an" by fi%ing the e%change rate and 4uantity. 5t is necessory that both Citi )an"  and Gretz Tool Company must be having opposite opinions about the future currency rate. 6lthough this might be a having a ris" of default from both sides due to e%traordinary fluctuation in the currency rates on the day of delivery. 1.3. )eyond other countries if the Gretz Tool Company is also having its subsidiary in U7 

and it feels that the e%change rate of the 8ound is increasing in the ne%t 9 Months and vice versa it assumes that the value of the 2:ollars is decreasing  and meanwhile the Citi )an" at U7 is having US dollars which it assumes that will gain increment in its value and vice versa it predicts a decline in the value of the 8ound for during the ne%t 9 Months. Thus based on the situation both Citi )an" and Gretz Tool Company can sign a 'uture Contract and come to an understanding where the Gretz Tool Comany will buy the 8ounds and Citi )an" will purchase the 2:ollars in the return. However through this deal the ris" of :efault will be comparatively less because both the ban" and the firm will have to deposit 3;< of the total contract value to the Clearing house not as a commission but in order to honor the contract. 1.4. )eside this in case both the firms reach to an agreement they can sign /ption Contract

with each others where the Gretz company may purchase the 8ound from the Citi )an"  with an /ption available to it. 2 2.1 The Citi )an" will use the /rganization of 5nter )an" Spot Mar"et. 3 3.1 'or the above stated 'inancial Transactions the Citi )an" would also serve as creditor 

and as a facilitator for the funds flow of Gretz Company.

B. =oo"ing at the current status of the Subsidiary and its operational =ocation in U7 it is shall

 be preferred that the subsidiary get loans in the local currency from the Citi )an" by the fact that Gretz might be using 8ound for invoicing the products it will also help it to determine its cash flow in the same currency and will be easy for it while settling bac" the loan with the  ban". 5t will also help the company to avoid unnecessary e%change rate ris" due to uniform currency availability. )y understanding the current mar"et demand in U7 it is mostly  preferable to borrow the U7 8ound because of being a local currency and having easy dealing methods. However loo"ing at the current interest rates offered by the Citi )an" to the Company it seems that the 8ound is comparatively higher in rate as compared to the other currencies listed out and that may shift the opinion of the company to borrow another currency. )ut still there will be the below ris"s concerned with borrowing the other currencies. •

5f the US dollars are borrowed due to the reason that its interest rate is less than that of 8ound. =oo"ing at the current currency values internationally the US dollars are a stable currency but again the firm will be re4uired to e%change the US :ollars into 8ounds in order to meet its payment regular re4uirements while setelling down the loan bac" it may  be difficult for the firm to purchase the US dollars bac" with pounds and return the loan. )ecause loo"ing at the current currency fluctuation rates the 8ound is losing its value by time to time.

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Similarly it is the same with other currencies as well li"e C6: and >8 these are also not local currencies although the interest rates are less as compared to the G)8 and US :ollars but still due to the low reputation of the currencies in the mar"et as compared to the US :ollars and 8ound the company may not face any problem while ta"ing it as a loan from the ban" but it will be difficult for the company to convert it once to the G)8 for the payments and other company e%penditure re4uirements. )ecause with the wea" currencies will cost too much while they are e%changed and sold against the power full currencies.

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C/?C=US5/?+ 5 would prefer the Gretz Company shall go for the G)8 loan with the rate of 39< annually that will help them avoid unnecessary e%change rate ris" and currency depreciation.

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