Ecobank's Cross-Currency Loan Funding An exercise in the international money market
Prof. Ian Giddy, New
Ecobank's funding choices
Ecobank is based in West Africa. The bank has just made a commitment to
provide a 6-month loan to a company in Benin, to purchase equipment for installing
micro-hydroelectric systems in Benin, Togo and Burkina Faso. The equipment
is to be paid for in pounds sterling, and the amount of the loan is GBP3
million. The rate is the 3-month Eurosterling offer rate plus a spread of
2.50%. Ecobank London is considering funding the loan in Euros or US dollars
instead of pounds. If the loan is funded in Euros or dollars, it would have
to be hedged in the forward exchange market.
Using the tables of rates below, calculate the cheapest way of funding
the loan. Explain carefully how it would be done.