Gretz Tool Company:

Gretz Tool Company is a large U.S based Multinational Corporation with subsidiaries in eight
different countries. The parent of Gretz provided initial cash infusion to establish each
subsidiary. However, each subsidiary has had to finance its own growth since then. The parent
and subs,idiaries of Gretz typically use Citicrop (the largest bank in the United States, with
branches in numerous countries) when possible to facilitate any flow of funds necessary.
a. Explain the various ways in which Citicrop could facilitate Gretzs flow of funds and
identify the type of financial market where that flow of funds occurs. For each type of
financing transaction, specify whether Citicrop would serve as the creditor or would
simply be facilitating the flow of funds to Gretz.

b. Recently, the British subsidiary called on Citicrop for a medium-term loan and was
offered the following alternatives:

Loan Denominated Annualized Rate

In.
British Pounds 13%

U.S Dollars 11%

Canadian Dollars 10%

Japanese Yen 8%

What characteristics do you think would help the British subsidiary determine which currency to
borrow? You can consider current FOREX spot rate also.
Answer
A. 1
1.1. Since the Gretz Tool Company is having its subsidiaries in other countries as well, and
therefore in case one of its subsidiaries is willing to invest in the Foreign T-bills, thus the
Citi Bank can help it out in providing the facility of Foreign currency swapping.

1.2. Based on the annual cash flow projection of the Gretz Tool Company, in case it feels that
it needs around $-1 Million in cash for the upcoming year and beside this it also feels
that the value of $ will appreciate in the future, it may sign a Forward Contract with the
Citi Bank by fixing the exchange rate and quantity. It is necessory that both Citi Bank
and Gretz Tool Company must be having opposite opinions about the future currency
rate. Although this might be a having a risk of default from both sides due to
extraordinary fluctuation in the currency rates on the day of delivery.

1.3. Beyond other countries, if the Gretz Tool Company is also having its subsidiary in UK
and it feels that the exchange rate of the Pound is increasing in the next 3 Months and
vice versa it assumes that the value of the $Dollars is decreasing , and meanwhile the
Citi Bank at UK is having US dollars which it assumes that will gain increment in its
value and vice versa it predicts a decline in the value of the Pound for during the next 3
Months. Thus based on the situation both Citi Bank and Gretz Tool Company can sign a
Future Contract and come to an understanding where the Gretz Tool Comany will buy
the Pounds and Citi Bank will purchase the $Dollars in the return. However through this
deal the risk of Default will be comparatively less because both the bank and the firm
will have to deposit 10% of the total contract value to the Clearing house, not as a
commission but in order to honor the contract.

1.4. Beside this in case both the firms reach to an agreement they can sign Option Contract
with each others, where the Gretz company may purchase the Pound from the Citi Bank
with an Option available to it.

2
2.1 The Citi Bank will use the Organization of Inter Bank Spot Market.

3
3.1 For the above stated Financial Transactions the Citi Bank would also serve as creditor
and as a facilitator for the funds flow of Gretz Company.
B. Looking at the current status of the Subsidiary and its operational Location in UK, it is shall
be preferred that the subsidiary get loans in the local currency from the Citi Bank, by the fact
that Gretz might be using Pound for invoicing the products, it will also help it to determine
its cash flow in the same currency and will be easy for it while settling back the loan with the
bank. It will also help the company to avoid unnecessary exchange rate risk due to uniform
currency availability. By understanding the current market demand in UK it is mostly
preferable to borrow the UK Pound because of being a local currency and having easy
dealing methods.
However looking at the current interest rates offered by the Citi Bank to the Company it
seems that the Pound is comparatively higher in rate as compared to the other currencies
listed out, and that may shift the opinion of the company to borrow another currency. But still
there will be the below risks concerned with borrowing the other currencies.
If the US dollars are borrowed due to the reason that its interest rate is less than that of
Pound. Looking at the current currency values internationally the US dollars are a stable
currency, but again the firm will be required to exchange the US Dollars into Pounds in
order to meet its payment regular requirements, while setelling down the loan back it may
be difficult for the firm to purchase the US dollars back with pounds and return the loan.
Because looking at the current currency fluctuation rates the Pound is losing its value by
time to time.
Similarly it is the same with other currencies as well like CAD and JPY these are also not
local currencies, although the interest rates are less as compared to the GBP and US
Dollars, but still due to the low reputation of the currencies in the market as compared to
the US Dollars and Pound, the company may not face any problem while taking it as a
loan from the bank but it will be difficult for the company to convert it once to the GBP
for the payments and other company expenditure requirements. Because with the weak
currencies will cost too much while they are exchanged and sold against the power full
currencies.

CONCLUSION:
I would prefer the Gretz Company shall go for the GBP loan with the rate of 13% annually, that
will help them avoid unnecessary exchange rate risk and currency depreciation.
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