Advantages And Disadvantages Of Parallel Loan

Global business today is subject to various kinds of risks. One risk that global business needs to handle is the foreign exchange risk. Foreign exchange risk is the risk when companies face a potential gain or loss due to the fluctuation of an exchange rate change. Companies can be subject to a significant financial loss, even with a small change in the exchange rate. Thus, the primary purpose of managing foreign exchange risk is to mitigate potential currency losses. There are at least three strategies companies use to manage their foreign exchange risk. They are forward contracts, currency swaps and “natural” hedges. Companies like Airbus, Tohoku Electric Power Company and Toyota utilized these strategies to reduce potential currency losses.

New entrants who set up similar projects may have access to long term loans at the prevailing rate of interest which may be cheaper. In such a situation, projects that were implemented with high cost borrowings will find it difficult to compete with the new entrants.

A significant proportion of the company’s revenue is generated from overseas operations in countries other than the United States. This means that the company has immense foreign currency exposure that may have a

General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import

3) Specialization in lending helps to reduce an asymmetric information problem in lending, (1) describe the problem. (2) What are the advantages/disadvantages of specializing?

The company’s existing portfolio has high risk options. They have been funding companies that requires huge amount of capital which increases the company’s risk. Also it was mentioned in the case that firm is experiencing a “Resource Problem”. Members of investment firm had been part of inner

Foreign exchange risk consists of three main types of exposures. First, transaction exposure is when a firm has a contractual obligation under which it supposed to receive or pay a certain amount in a currency that is different than its home currency. Transaction exposure has an effect of the firm’s income statement because the accounts payables or receivables can be affected by currency exchange rates. Second foreign exchange exposure is the translation which impacts the balance sheet of the firm. It occurs when consolidating financial statements of foreign units into a company’s home currency. The third type of foreign exchange exposure is the economic which influences a firm’s cash flows when exchange rates change. This type of exposure can impact assets, liabilities, or any type of anticipated foreign currency cash exchange.

This will enable the company to raise huge amount of funds by issuing bond. The main advantage is that the company is not required to pay principal until maturity time; risk involved in bond issue is less which will reduce the cost of loan (Www.boundless.com, n.d.). Debt financing will not dilute the ownership and any decision related to the company can be made fast without any intervention, company will have more independence to make reinvestment of entire profit earned into the future development of the business (Inc.com, n.d.). In this case, debt holders do not have any claim over the economic profits apart from the interest payment, and debt market is more efficient (Bradshaw, 2013). Fixed amount

Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.

As the lender is taking much more risk on such an arrangement the amounts you can borrow are much lower and the rates of interest much higher.

Statement of Problem: Comparing to Company J, the major problem of Company I is its high Long-Term Debt balance. With higher “Total Debt/Total Assets” and “LT Debt/Shareholders’ Equity” ratios, more of its assets have been financed by debts. It has been aggressive in financing its growth with debt. The cause of these actions might be because of its big investment in high capacity paper producing machines. Anyhow, might be because of its maturation, it has more profitability with the money shareholders have invested.

Those involved in the lending process establish financing terms to protect the positions of all parties. The debt guarantee in Williams’ proposed financing, for example, provided insurance for the repayment of debt. Williams would essentially act as a co-signer for Williams Production RMT’s obligations to Berkshire Hathaway and Lehman Brothers. Per the terms, Williams would have to agree to make payments in place of Williams Production RMT if any of the payments were late or not paid.

Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that

Through international factoring and a financial guarantee from us, we solved their enterprise financing problems by using buyer’s credit quota determination. They changed their settlement to credit sale and settled, which saved us from the trouble foreign exchange, credit cost and letters of credit. As a result the two companies’ monthly volume increased to $1 million, meeting their targets.

U.S. Semiconductor, a semiconductor manufacturer decided to expand their business to UK market in 1980. Their new business plan needed specialized technical support facility in UK. In order to minimize the equity investment, they decided to fund their assets mostly with debt. As Semiconductor owned subsidiaries, which spread all over the world, they face great exchange risk. Besides, instead of building a production department in UK, Semiconductor kept producing their products domestically and delivered them to UK by plane. British firms also confronted exchange risk due to the difference between import costs and sales revenues. This case mainly involves the discussion on the method of debt funding.