Carrefour

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Carrefour

FIN4812
International Finance

Case Analysis
CARREFOUR S.A

This report is created with a discussion over several important international finance topics for instance, interest-rate parity, currency risk management, regarding description on Carrefour S.A. financing policies as well as hedging strategy. Additionally, we also discussed on which currency Carrefour should issue its 10-year, 750 million euro, annual coupon bond, its foreign currency risk exposure and a possible hedging decision in dealing with any or all of the identified risks.

Summary of the Case Study
This case is related to Carrefour S.A. planning to finance its growth by issuing debt securities and considering borrowing in British sterling in order to take advantages of the opportunity in that currency. Carrefour is a France large retail-stores business starts up in 1963. Carrefour S.A. was Europe’s largest retailer. They have had a expedite growth with many acquisitions by opening their branches throughout Europe like Belgium in 1969 and also Brazil in 1975 and have become the largest retailer in France, Belgium, Greece, and Spain. Moreover, have done mergers with Euromarche and Montlaur in 1991, Promodes in 1999.

They are said to be profitable in many regions they do operations in. The company expected to maintain its expansion strategies on and has started to relaunched its expansion in China, with the opening of store in Chengdu in June.

Carrefour hedged their foreign currency exposure on imported goods through currency-forward contracts. Most of the Carrefour borrowings (debt) are denominated with many currencies accompanying of EUR 13.5 billion. However it has been hedged. As the company is decided to use bonds in this financing deal they need to take into considerations of the country’s current inflation, interest-rate and exchange rate environment. The countries they are taking into accounts are Euro which would be priced at a coupon rate of 514, 538 in British pounds, 358 in Swiss Francs, or 512 in US Dollars. However, the Swiss Franc had consistently been the lowest rate.

Problem Identification
Europe’s largest retailer, Carrefour S.A., is seeking to raise €750 million debt financing at a low costs by issuing it bond either in domestic country’s which is France currency or issue foreign currency denominated bond. In August 2002, Carrefour S.A.’s investment banks, Morgan Stanley and UBS Warburg, had expected that the Carrefour 10-year bonds could be issued at 5.25% in Euros, 5.375% in British pounds, 3.625% in Swiss francs, and 5.5% in U.S. dollars. Its investment banks also suggested that the British-pound issue appears to provide the lowest cost of funds. This report is performed on the basis of the information on hand and the report was not been expanded beyond the scope of the data information provided by Carrefour S.A. The interest rate parity (IRP) is the main underlying theory that is used in this report. The excel spread sheet is only used.

All in all, our objectives in analyzing Carrefour case study are to examine the borrowing option which provide Carrefour with the lowest cost of funds as well as to determine the currency risk hedging strategy for Carrefour in obtaining its needed financing.

Recommendation of Strategies
Given the four choices of bond market, in British pound, Swiss Franc, US Dollars and Euro, to illustrate which market is more competitive, cost of issue, tax implications, and arbitrage opportunity are factors that should be evaluated. 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.

Generally borrowers of foreign currencies can decrease its risk and economic exposure by hedging against the currency borrowed with another currency that traditionally moves in the opposite way of the...
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