The U.S. Commerce Bank in St. Louis is trying to expand its overseas bank lending market. The
Question:
The U.S. Commerce Bank in St. Louis is trying to expand its overseas bank lending market. The bank has the opportunity to provide a profitable loan to the UK subsidiary of the local Teledyne Corporation. However, the bank has to obtain 50 Million PS for three months right away to fund the foreign loan, which will be repaid back in Pound Sterling (PS). The CFO has taken an international banking seminar and is aware of the Eurocurrency market that can be utilized to borrow in foreign currency. In light of the data given below for the Eurocurrency interact rates available to the market, the CFO of the bank is now evaluating the funding cost of the following three alternatives:
1. Borrow 3-month money in the Eurocurrency market in pounds sterling
2. Borrow one-month in the Eurocurrency market in Pound sterling and then roll over.
3. Borrow 3-month US dollars, change them into sterling at the spot rate and then hedge the repayment using the purchasing Pound sterling in the forward exchange market.
Questions:
What is the relative cost of each proposal? Which proposal should the CFO of the Commerce Bank take? Justify!
Expert Answer:
US Bank require to borrow Pound Str50 million Options 1 Borrow 3 months Eurocurrency Market that can ... View the full answer
