CHAPTER 11: SHORT TERM FINANCING

FACTORS IN SHORT TERM

FINANCING
1. FISHER EFFECT
The international fisher effect states that interest
rate differential between two countries should be
an unbiased predictor of the future change in spot
rate.

2. Exchange rate exposure

Many companies tend to borrow from the country
in which their subsidiaries are located. Such
action is meant to offset their exposed liabilities
with the current assets of that country in which the
subsidiaries are located.
Muhamad Sukor bin Jaafar 1
CHAPTER 11: SHORT TERM FINANCING

FACTORS IN SHORT TERM

FINANCING
1. Attitude towards risk
we need to look at whether the company is a risk taker or a risk
adverse. If you are willing to take risk then you will be willing to pay
a higher price to reduce your currency exposure.

2. Costs involved in borrowing

under the circumstances, where forward contracts are available, a
company should not bother about currency risk if interest rate
parity holds. Company’s borrowing strategy will be affected when
costs involved in borrowing are higher. This can be due to
government capital controls or threaten to impose such controls.

3. Political risk
the decision to borrow in either at home or abroad will depend on
the foreign country’s degree of political risk. It is advisable for
company to borrow at home when it foresees the possibilities of
exchange controls or expropriation are apparent.

Muhamad Sukor bin Jaafar 2

CHAPTER 11: SHORT TERM FINANCING

SHORT TERM FINANCING OPTIONS

1. INTER COMPANY FINANCING

Since MNCs have many subsidiaries
operating in many countries, this allows
inter company loans to be possible. This
type of financing is sometimes preferred
because company has controlled over the
mode and timing of the loan. However, due
to the exchange control and the length of
loan, inter company loan may not be
attractive.
Muhamad Sukor bin Jaafar 3
CHAPTER 11: SHORT TERM FINANCING

SHORT TERM FINANCING OPTIONS

1. Locally currency financing

a. Term loans
b. Line of credit
c. Revolving credit agreement
d. Discounting

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CHAPTER 11: SHORT TERM FINANCING

SHORT TERM FINANCING OPTIONS

1. Euro notes and Euro Commercial

paper
Euro currency market is made up of
banks that accept deposits and give
loans in foreign currencies. The word
‘Euro’ simply indicates that the loans
or deposits are issued not from the
county in which the currency they are
denominated.
Muhamad Sukor bin Jaafar 5