FIN534_Week_10_Discussion

"Multinational Financial Management" Please respond to the following:

From the e-Activity, determine key reasons why a multinational corporation might decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country like Switzerland, where interest rates are low. Provide support for your rationale.

Investors are always tending to borrow where the interest rates are low. However, there are some factors that drives multinational companies to borrow in countries where it’s borrowing interest rate is higher than home country or other countries that they invest at. The reason from choosing to borrow with higher interest rates is that the country has high inflation so the Purchase Power Parity for its currency is low. For example, a U.S based multinational company that has investments in Brazil, will borrow in the same currency where they are going to invest. It will be so beneficial to the company because this will encourage the investment and the interest will be added to the country economy. Another reason, it would be helpful for multinational companies to borrow in the country where they are going to invest or import from, the reason is that the company will reduce the losses that might occur from the currency exchange price change. If the company is importing constantly from suppliers in Brazil, then they will use the capital that they borrowed from Brazil to purchase the products, then the loan will get paid back using the home country currency which is usually higher in its purchase power parity value such as US Dollars.

From the scenario, select two (2) potential international markets in which TFC may wish to do business. Compare the currency markets of the two (2) countries you have chosen with that of the U.S. dollar. Based on currency considerations only. recommend whether or not TFC should expand to the international markets that you have chosen.

The two countries that I chose for TFC to consider are Great Britain and Japan. Both economies are very strong and established countries. Great Britain’s currency is the Pound and Japan’s currency is the Yen. Currently, the Pound is 0.6615 to the Dollar, and the Japanese Yen is

120.89 to the Dollar. Japan has a lower rate of inflation compared to Great Britain. Both Great Britain and Japan also have solid Bond Ratings, Great Britain a little better than Japan, although if you consider Hong Kong, they do have an AAA. I would say that expanding in either market based on currency exchanges and the stability of the country’s economy either would be ok to expand into. British Pound and Japanese Yen are in the Top ten rates on the currency dollar rates table.