Carrefour S.A.

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Carrefour S.A. is a large multinational corporation that aims to issue EUR 750 million worth of debt. Consequently, Carrefour must decide the market in which it wants to place its bonds. The company had historically financed growth using securities denominated in the currency of its business operations.

However, Carrefour’s investment banks, Morgan Stanley and UBS-Warburg, recently recommended borrowing in British pounds sterling to take advantage of a borrowing opportunity in that currency. This recommendation seems counter-intuitive prima facie, given that the British coupon rate is higher than those in all the other currencies, particularly the Swiss franc.

Nevertheless, there are several reasons why investing in the British pound is a good idea. While the nominal interest rate of the Swiss franc is lower than that of the British pound, the real interest rate of the British pound is lower because of the relatively higher inflation rate in the U.K. Moreover, the exchange rate for GBP/EUR (.628) appears more favorable than the exchange rate of CHF/EUR (1.453). In addition, we can calculate the implied forward rates to further help us with our decision. We can use the formula F (f.c./EUR) = (1+i(f.c.))N/(1+i(EUR))N*S(f.c./EUR) to find the implied 10 year forward rates:

The low forward rates for GBP/EUR suggest that borrowing in British pounds is a wise choice.

Next, we must use the implied forward rates to calculate the cash flows for each currency (in Euros). This will allow us to compare each currency and see which one has the smallest cash outflow (which is the best option, since we are issuing debt). We do this by finding the coupon payment in each currency and then dividing it by the implied forward rate for the appropriate year.

Using this information, we can see that the cash outflow for the GBP is the smallest, which further suggests that borrowing in British pounds is advantageous. Plus, the cash outflow is greatest for the...
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