Short Term Financing With Foreign Currency - 1223 Words

Financing in Foreign Currency Decision of short term financing with foreign currency has both pros and cons which can impact, maximizing the value of the Specialty Coffee Shop. In general, MNC should consider borrowing in the currency that offers lower interest rate which will reduce the cost of borrowing. According to the textbook exhibit 20.1 MNCs that conduct business in developing countries have high interest rates compared to developed countries, thus increase the cost if money is borrowed in the local currency. The Specialty Coffee Shop would need to consider the interest rate in the United States (Dollar) versus the interest rate when borrowing in Pakistan (the Pakistan Rupee). Figure 1 in Appendix shows the interest in†¦show more content†¦The decision for MNC is based on a tradeoff of the expected reduction in financing expenses versus the risk that the currency borrow appreciates against their inflow currencies or vice versa. According to Madura (2015) â€Å"the following effective financing rate formula can be used to compare positive and negative effective rate on actual cost using. rf = (1+if)(1+ef)-1 Where rf = effective financing rate if = interest rate of the foreign currency ef = percentage change in foreign currency spot rates†. Appendix Figure 3 shows real effective exchange rate of Pakistan Rupee on the rise in recent years that would increase the cost of the loan for example suppose a Pakistan Rupee debt can be obtained at 5.75% (against a U.S. dollar) and Pakistan dollar over the life of the loan appreciated 10% than the effective rate is 29.6% (rf = (1+.0575)(1+.10)-1 = 16.33%). The actual cost of financing in Pakistan Rupee is greater than 5.75% interest rate due to the appreciation of the Pakistan Rupee. If the Pakistan Rupee depreciate by 20% than the actual cost of the financing is -26.9% (rf = (1+.0575)*(1+ (-.20))-1 = -26.9%). The determining of the effective financing rate can be helpful in the decision making, however the risk is uncertainty of the exchange rate movement for Pakistan Rupee. (Madura, 2015). The attractiveness of lower costs of financing due to depreciation of Pakistan Rupee will increase the foreignShow MoreRelatedStarbucks Is The Biggest Most Valuable Fast Food Brand Worldwide846 Words   |  4 Pagessecond after global giant McDonalds. (statista.com) Short term financial needs Short-term financing is a fast and flexible way for companies to obtain funds for the daily operations of the business and it is a method of raising funds involving financial obligations that need to be repaid within a year or less. The businesses with cyclical operations like retailers or those engaged in international trade usually obtains financing through short term debt. 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