You see the following quotes for the USD/AUD: USD/AUD | Bid | Ask Spot | 0.8823
ID: 2760641 • Letter: Y
Question
You see the following quotes for the USD/AUD:
USD/AUD | Bid | Ask
Spot | 0.8823 | 0.8945
Forward | 0.8693 | 0.8818
AUD Libor | 2.00% | 2.10%
USD Libor | 0.50% | 0.65%
Your company headquartered in the US is expanding sales to Australia, and needs to raise AUD 1,000,000 to finance the opening of a new sales office in Sydney. Your company is not well known in Australia and can borrow from Austalian banks at 300bps over Libor. The company can borrow at 100bps over Libor in the US.
a) How much will it cost the company to borrow directly in Australia?
b) Can the company use the futures market to borrow indirectly? If so, how much will it cost?
Explanation / Answer
Answer:
a.
Cost to the Company for borrowing AUD 1,000,000 directly in Australia
Rate of Interest for Company of a AUD Loan = 300 bps + LIBOR = 3% + 2.10% = 5.10%
Therefore cost in AUD = 5.1% of AUD 1,000,000 = AUD 51,000 or 51,000 x 0.8945 = $ 45,619.50
b.
Yes, the Company can use futures market to borrow indirectly by borrowing in USA today and converting it in AUD and at the same time entering into a future contract for sell of AUD and buy of USD to satisfy the loan. This strategy will cost as under;
Amount in USD to be borrowed today to equal 1,000,000 AUD = 1,000,000 x 0.8945 = $ 89,450
Rate of Interest in USA = 0.65 + 100 = 1.65%
Borrowing Cost = $ 89,450 x 1.65% = $ 1,475.925
Along with this borrowing cost the Company will incure future contract cost.
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