International Finance: Currency Borrowing and Bond Selection
This paper addresses three core international finance decisions for a corporate borrower. First, it calculates and compares effective financing rates for borrowing in Australian dollars, Japanese yen, U.S. dollars, and euros, concluding that the U.S. dollar offers the lowest cost of borrowing. Second, it recommends using a two-year forward rate agreement to hedge against anticipated interest rate increases of 150 basis points. Third, it evaluates three bond types — straight fixed-rate debt, zero coupon bonds, and floating rate notes — recommending a zero coupon bond as the most practical instrument for a one-year debt horizon, given its simplicity and comparable cost relative to other structures.
- Determining the Cheapest Currency to Borrow In: Calculates effective financing rates across four currencies
- Recommending U.S. Dollar Borrowing: Justifies U.S. dollar as lowest-cost borrowing option
- Hedging with a Forward Rate Agreement: Uses forward rate agreement to lock in USD borrowing rate
- Bond Types Available to Development Unlimited: Compares fixed, zero coupon, and floating rate bonds
- Recommended Bond Structure for One-Year Debt: Recommends zero coupon bond for one-year horizon
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What makes this paper effective
- Each task builds logically on the last — currency selection informs the hedging strategy, which informs the bond issuance recommendation — creating a coherent analytical progression.
- Recommendations are directly justified with quantitative reasoning (e.g., effective interest rates, basis point projections, loan repayment amounts), grounding qualitative conclusions in numerical evidence.
- The paper acknowledges uncertainty (e.g., future exchange rate changes) while still defending its recommendations, demonstrating nuanced financial judgment rather than overconfident assertion.
Key academic technique demonstrated
The paper demonstrates applied comparative analysis in a finance context: it constructs a multi-currency effective financing rate table, interprets the results to make a defensible recommendation, and then carries that recommendation forward into hedging and instrument-selection decisions. This chaining of analytical outputs across tasks is a hallmark of professional finance writing and shows how individual calculations inform broader strategic choices.
Structure breakdown
The paper is organized into three tasks. Task 1 computes effective borrowing rates across four currencies and recommends U.S. dollars. Task 2 uses that recommendation as a foundation for designing a forward rate agreement hedge against anticipated rate increases. Task 3 surveys three bond structures — plain vanilla, zero coupon, and floating rate notes — and selects the zero coupon bond for its simplicity over a one-year time frame. Each section is concise and focused, moving efficiently from analysis to recommendation.
Determining the Cheapest Currency to Borrow In
In order to determine which currency is the cheapest to borrow in, the effective financing rate for each must be calculated. For the Australian dollar, the effective financing rate is 8%, which is the one-year interest rate. For the other currencies, the effective financing rate must be separately computed.
To illustrate the method: $500 AUD converted to JPY yields ¥44,642 this year. At a 4% interest rate, the repayment amount becomes ¥46,428. The expected spot rate for AUD/JPY in one year is 0.015, so ¥46,428 will be worth AUD 696.43 in one year's time. This represents an effective interest rate of 39.29%. The same calculation can be repeated for the remaining currencies, as summarized in the table below.
Recommending U.S. Dollar Borrowing
It is recommended that the company borrow in U.S. dollars. The table above shows the effective rate for borrowing in each currency. The effective rate reflects the true cost of money for the firm if it were to borrow in a foreign currency and then repay in that same currency. The cost of U.S. dollars is the lowest, followed by the cost of Australian dollars. The other currencies carry a higher cost of borrowing.
It should be noted that the cost of borrowing depends on the future cost of the currency exchange. This cost is estimated based on the current expected exchange rate in one year's time. While that rate could change, the change is not expected to be significant enough to overcome the disparity in the effective rates across these currencies. Therefore, the U.S. dollar option is recommended.
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