Case Study on Carrefour

Carrefour has a debt-financing requirement of Euro750 million and it chooses to issue a 10-year bond to finance the need. There are four choices of bond market, in British pound, Swiss Franc, US Dollars and Euro. Issuing in different currencies leads to different coupon rate, currency value and economic environments (including interest rate, inflation and so on). In order to choose issuing in which currency is most efficient, comparison is needed.

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued, which is to say outside the domestic market. Eurobond market exist because innovative and competitive firms found a market niche for them. Companies will issue eurobonds as long as they are competitive comparing with domestic bonds, and it is not because the domestic market not available. To illustrate which market is more competitive, cost of issue (both in money and time), tax implications, and arbitrage opportunity are factors that should be evaluated. Generally speaking, firms issue eurobond because it is more efficient.

Borrowers of foreign currencies can decrease risk by hedging against the currency borrowed with another currency that traditionally moves in the opposite way of the currency held, or through take long position in corresponding forward to lock the exchange rate at wanted number.

The coupon rate of Swiss Franc is much lower than other currencies. But it is not the standard of evaluating which currency should be borrowed. We will use parity forward rates to evaluate the borrowing cost of each currency and the currency has the lowest cost should be chosen. The basic known information is listed as following:

Initial Borrowing Amount: 750 mil Euro

Coupon Rate(euro): 0.0525

Coupon Rate(British Pound): 0.05375

Coupon Rate(Swiss) 0.03625

Coupon Rate(USD) 0.055

Spot rate (S0)- foreign/Euro

(e.g 0.628 pound = 1Euro) EURO

EURO 1

British Pound 0.628

Swiss Franc 1.453

USD 0.98

Risk-free rate (e.g.: rf-pound-1year)

1- year 2-year 3-year 4-year 5-year 6-year 7-year 8-year 9-year 10-year

EURO 3.514 3.816 4.11 4.342 4.53 4.688 4.819 4.928 5.017 5.087

British Pound 4.258 4.622 4.91 5.088 5.19 5.249 5.292 5.331 5.358 5.374

Swiss Franc 1.125 1.713 2.172 2.498 2.743 2.948 3.12 3.267 3.394 4.499