INTERNATIONAL FINANCE

International Finance

International Finance

As chief treasurer of GHWB Manufacturing Plc, you are required to insure your company for all international transactions up to the 30th of June 2010 using all possible hedging options. At the same time, you are required to estimate the monthly cash flow position of the company for the same period assuming an opening cash balance of £3,250,000.You should comment on the assumptions you make.

Apart from the UK interest rate, which may be subject to change in February 2010 after the next meeting of the governors of the GHWB Manufacturing Plc of England, these interest rates are not expected to change during the next six months. However, for the case of the UK, no major revision is forecasted with a worst-case scenario of an increase of 0.25 basis points to current UK interest rates.

Early this morning, Monday the 9th of January 2010, a meeting was held with the company's finance director Mr. John Cochrane. Despite the above evidences of a global economic recovery for the year 2009, he raised major concerns about the possibility of a continued slowdown especially in the UK economy mostly triggered by flat consumer spending caused by substantial levels of negative equity undertaken by the UK consumers and further inflationary pressures in the economy instigated by the current levels of oil prices.

On the basis of his estimates, the company needs to insure itself in terms of future fluctuations of the local currency in relation to all of its foreign transactions. He also required more investigation to be made in the future impact of these transactions on the cash flow position of the firm and needs suggestions to be made with regards to possible international financing to balance a potential cash deficit of the firm.

Months

Receipts

Payments

Net Cash Flow

Feb

2600000

0

2600000

March

3000000

5050000

-2050000

April

8550000

17330000

-8780000

May

9850000

1875000

7975000

June

26800000

11900640

14899360

Write a report of no more than 500 words to your finance directors concerning the possible sources of international short-term financing that can be used to overcome any possible cash deficit. Your answer should also comment on the potential cost of the financing.

When private investors borrow short-term, they may fall into "maturity mismatch" difficulties. Maturity mismatch difficulties arise when the assets backing short-term debt obligations are longer-term, and therefore less liquid, than their liabilities. Illiquid assets cannot be sold quickly at fair value. One common example of an illiquid asset is real estate, where it takes some time to locate a buyer willing to purchase the asset at its fair value. Another example is an ongoing business concern, whose intrinsic value far exceeds its immediate liquidation value.

Chang and Velasco (1999) adapt the well-developed literature on banking to show that these maturity mismatches among private investors can leave nations prone to multiple equilibria problems that are dependent on the beliefs of foreign investors. For example, consider the possibility of two equilibria: The first is a "good" equilibrium, an outcome under which foreign investors expect that a country will be able to service its outstanding debt obligations; in that case, most short-term investments will be rolled ...