XCF Company wants to raise $9 million with debt financing to finance the entry into a foreign market. These funds are needed to finance working capital, and XCF will repay them with interest in one year. The company is considering three options:
a) Borrowing U.S. dollars from a U.S. bank at 8% interest rate
b) Borrowing British pounds from the Royal Bank of London at 10% interest rate
c) Borrowing Euros from the Deutsche Bank in Frankfurt at 5% interest rate
If XCF borrows in foreign currency, they will have to convert it immediately in dollars at today’s spot rate. In one year’s time, they will have to pay back the bank in the currency they borrowed it plus interest. To do so, they will convert U.S. dollars using the spot rate in a year’s time.
Currently, the exchange rates are: 1 Euro = $1.50 and 1 British Pound = $2.00. The estimate of XCF’s CFO is that in one year, the British Pound will depreciate relative to the U.S. Dollar by 10% and the Euro will appreciate relative to the U.S. Dollar by 5%. From which bank should XCF borrow and why? Show all your calculations!