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Small Business Dilemma
Should Jim borrow dollars or pounds to finance his joint venture business? Why?
Based on an analysis of the external factors affecting this scenario, including present and forecasted interest rates for the Unites States dollar and the British pound, it is clear that Jim should definitely borrow pounds to finance his joint venture business. This conclusion is based on the established fact that "the actual cost of financing by the debtor firm will depend on: (1) the interest rate charged by the bank that provided the loan, and (2) the movement in the borrowed currency's value over the life of the loan" (Madura & Fox, 2007). Despite the fact that the British interest rate is somewhat higher, Sports Exports Company would be able to offset a portion of the firm's exposure by electing to borrow British pounds...
By choosing British pounds over American dollars, Jim is afforded the option of utilizing of some or all of his future receivables in pounds as repayment on the British loan, instantly reducing the amount of pounds which will later require conversion to dollars.
Jim could also borrow Euros at an interest rate that is lower than the U.S. Or British rate. The values of the euro and pound tend to move in the same direction against the dollar but not always by the same degree. Would borrowing Euros to support the British joint venture result in more exposure to exchange rate risk…
References
Abdulnasser, H.J. (2009). The international fisher effect: Theory and application. Investment Management and Financial Innovations, 6(1), 117-121. Retrieved from http://www.businessperspectives.org/journals_free/imfi/2009/imfi_en_2009_01_Hatemi- J.pdf
Madura, J., & Fox, R. (2007). International finance management. (8th ed., p. 693). London, England: Thomson Learning. DOI: books.google.de/books?id=5cBqxUwGtvkC&pg=PA601&hl=de&source=gbs_toc_r&cad =4
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