Using International Financial Markets

Mignon Howell

Week 1

Analytical Application

Using International Financial Markets

Worcester Tool Company is a large, U.S.-based, multinational corporation with subsidiaries in eight different countries. The parent of Worcester provided an initial cash infusion to establish each subsidiary. Each subsidiary, however, has had to finance its own growth since then. The parent and subsidiaries of the firm typically use Citigroup (with branches in numerous countries) when possible to facilitate any flow of funds necessary.

1. Explain the various ways in which Citigroup could facilitate Worcester’s flow of funds, and identify the type of financial market where that flow of funds occurs. For each type of financing transaction, specify whether Citigroup would serve as the creditor or would simply facilitate the flow of funds to the firm.

There are several ways that Citigroup can facilitate the flow of funds to firms. One advantage that Citigroup has is that they can provide short term loans for current assets and inventory. This advantage allows Citigroup to act or provide services as a creditor.

Citigroup can also provide long term loans to accommodate the financing of long term assets. In this case the bank would serve as the creditor for long term.

In case the company wants to float ADR or GDR, the bank (Citigroup) can facilitate and act as the custodian for the shares and issue ADR OR GDR in foreign currency. (What Is An ADR?, n.d.) In this case they are acting as facilitator. Company may also want to raise capital through bonds. Bank can help in the same and here too they would act as the facilitator.

1. Recently, the British subsidiary called on Citigroup for a medium-term loan and was offered the following alternatives.

• Very little information is given but from assumption or the basic knowledge of the rules you can determine:
• Ideally the company would take the loan at the least annualized rate. Hence if this is the only condition then the company would take loan in Japanese Yen.

• But they would have to consider the exchange rate risk in the future while they would be repaying the loan. Also, the political and the economic condition in Japan might add to the risk for the company. All these factors would be considered before taking any decision.

• Japanese yen, over the last three years (2012-2015) depreciates against the British Pound, so it is good if the value of Japanese Yen in the future still keep decreasing in value when there is a due date for the British Subsidiary to repay the loan because they can benefit from the appreciation of the British Pound. (Japanese Yen to British Pound, n.d.)

• Comparing the US dollar to the British Pound has high fluctuation over the last there years (2012 -2015) so it is risky for the company if it takes a loan in the US dollar. There are two main reasons that the company would not take the loan in the US dollar. First, there is a higher rate of loan compared to Canadian dollar and Japanese Yen. Secondly, the fluctuation of the US dollar against the British Pound is high over the last there years. (The US dollar to British Pound, n.d.)

• Canadian dollar mostly a bit appreciates against the British Pound over many years except at the end of 2013, and it is a bit stable now compared to the British Pound. If the British Pound deprecates against the Canadian dollar as it generally is at the end of the loan, then the company will lose benefit from the exchange rate. (Canadain Dollar to British Pound, n.d.)

By comparing between these currencies, I would suggest the company take the loan in Japanese Yen since it is the lowest rate of loan, and this currency is the most depreciated against the British Pound. However, the British subsidiary would have to consider exchange rate risk in the future while they would be repaying the loan. Also, political and the economic condition in Japan might add to the risk for the company. These factors must be considered before making any decision.