Please respond to the following:
- Determine the key reasons why a multinational corporation might decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country like Switzerland, where interest rates are low. Provide support for your rationale.
Be sure to respond to at least one of your classmates’ posts.
From professor:
Many of us are risk adverse as we have discussed in previous chapters. Since we are risk adverse, do we carry this over into business transactions? Multinational corporations are in business to make money. That being said they want the biggest bang for their buck. When looking at getting the biggest bang for the buck one would instantly say lower interest rates are better. However, multinational corporations have many factors to consider such as inflation, purchasing power parity, interest rates, and other qualifications. It would make more sense to borrow at higher interest rates from Brazil because when it is time to pay it back, the Purchase Power Parity for its currency is low. It would also make more sense to borrow from Brazil because if the U.S. is going to do business with them as far importing the risk of loss due to exchange rates may decrease. The most important reason to borrow from Brazil than Switzerland would be the fact that Brazil has less terms and conditions. Brazil is trying to build the economy more and by having higher interest rates they can get their money back faster. Switzerland does not need the money. So, they have lower rates to attract borrows but they do not have flexible terms or conditions. It is like the example of taxes in the textbook where Yogi Berri was asked how he wanted his pizza sliced. He responded that he wanted six because he is not hungry enough for eight (Higgins, Koski, & Mitton, 2019). No matter how many slices you make the pizza is still the same size. How can you apply this to getting loans from different loan institutions?
Reference: Higgins, R. C., Koski, J. L., & Mitton, T. (2019). Analysis for financial management (12thFinancial Management (12th ed.). New York, NY: McGraw-Hill Education.
