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Prof. Ian Giddy

Tel 212-998-0426; Fax 212-995-4233

E-mail: ian.giddy@nyu.edu Web: http://giddy.org

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Background

 

Jules Okanbo is the Manager of International Trade at Ivoire Rubber, a rubber products company based in Abidjan, Cote d'Ivoire. In early 2002 Jules was concerned with how to finance the growing international trade of his company's exports to North American tire companies.

 

Jules was looking at ways to fund the exports of Ivoire Rubber to Mexico, the subsidiary's second biggest market in North America. These sales were invoiced in Mexican pesos. Currently, the Ivoirian company had MP500,000 worth of receivables due in 3 months. In the past, these had been financed in U.S. dollars, partly because dollar rates had been much lower than Mexican interest rates. Now, however, with U.S. rates rising and Spanish rates lower, Okanbo thought peso funding might be the more attractive approach, particularly given the exchange risk involved in funding peso receivables with U.S. dollars. While the peso had been quite stable, he was worried that the crisis in Argentina might have a contagion effect.

 

So now he was considering three possibilities:

 

Possibilities

 

1. Continue funding in U.S. dollars. Given his economist's forecast that the peso might get stronger in the next three months, from $1=128 pesos to $1=126 pesos, this could be the cheapest

2. Switch funding to pesos, despite the slightly higher cost

3. Borrow in dollars, but hedge the exchange risk in the forward market.

4. Switch funding to CFA francs, the West African currency linked to the Euro.

 

How should he evaluate these choices? He had only the following information (for three month loans):

 

Rates

 

Dollar 3-month loan rate	5 9/16%
Peso 3-month loan rate	7 15/16
Spot exchange rate today	MP128.210 per USD
3-month forward rate	MP129.005 per USD
Forward discount, % per annum	-2.5

 

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