INTERNATIONAL FINANCIAL MANAGEMENT
6) Suppose Dell wants to borrow $500 million or the foreign currency equivalent for 4
years. It has decided to use international bond markets rather than the U.S. market as a
source of funding. It is considering the following:
(i)
Borrow in $ using a Eurodollar bond. The bond could be issued at 100.5%
of face value with a coupon rate of 5%. Expenses associated with the
issue would be 1.8% of the amount borrowed.
(ii)
Borrow in euros using a euro-denominated Eurobond. The euroEurobond has a face value of euro 400m., and it can be issued 99.5% of
face value with a coupon rate of 3.5%. Expenses associated with the issue
would be 2.5% of the amount borrowed.
(iii)
Borrow using a dual currency Swiss franc Foreign Bond. The bond is
issued in SF, the coupons are paid in SF, but the principal is repaid in US$.
The bond would be issued in Switzerland, subject to the same registration
requirements as an ordinary SF bond issued in Switzerland. The SF bond
can be written with a face value of SF 600m., and could be issued at par
with a coupon of 6.2%. Expenses associated with the issue would be 2.2%
of the amount borrowed. At maturity, the bonds face value payment
would be would be $470 million.
Assume that Dell would hedge the exchange risk of its international
payments using the forward market. The bank is quoting Dell the
following rates:
$/euros
Spot
1-yr Forward
2-yr Forward
3-yr Forward
4-yr Forward

Bid
$1.2500/euro
$1.2610/euro
$1.2790/euro
$1.2840/euro
$1.3020/euro

Offer
$1.2505/euro
$1.2618/euro
$1.2805/euro
$1.2855/euro
$1.3038/euro

Bid
SF 1.1950/$
SF 1.2115/$
SF 1.2280/$
SF 1.2420/$
SF 1.2595/$

Offer
SF 1.2000/$
SF 1.2125/$
SF 1.2295/$
SF 1.2435/$
SF 1.2610/$

SF/$
Spot
1-yr Forward
2-yr Forward
3-yr Forward
4-yr Forward

a) Given the three financing alternatives described above, and Dells desire to hedge its
exchange risk in the forward market, which alternative offers the lowest financing
rate for Dell (compute all-in-costs)?

1

b)

Suppose the face value payoff of the dual currency bond is $480 million and Dell
continues to hedge its risk in the forward market. Does this change your conclusion?
Explain.

c) Suppose instead of using the forward market, Dell considers hedging the euro
Eurobond using a 4-year currency swap in which Dell would pay dollars and receive
euros (fixed rates). A swap bank provides the following quotes to Dell
bid
offer
dollars
5.9
6.0
euros
4.3
4.4
What would be the all-in cost of the Euro eurobond in this case? [Hint: you will need
to compute the notional principal for this problem)
d) Other than rate of return differences, are there other factors that Dell may want to take
into account when choosing between the Eurobond issues and the SF dual currency
bond?