CARREFOUR S.A.
Synopsis and Objectives
In August 2002, the French retail giant Carrefour S.A. is considering alternative currencies for raising (euros) EUR750 million in the eurobond market. Carrefour’s investment bankers provide various borrowing rates across four different currencies. Despite the high nominal coupon rate and the lack of any material business activity in the United Kingdom, the British-pound issue appears to provide the lowest cost of funds if the exchange rate risk is hedged.
The case is designed to serve as an introduction to topics in international finance. Topics of discussion include foreign-currency borrowing, interest-rate parity, currency risk exposure, derivative contracts (in particular forward and swap contracts), and currency risk management. Students are tasked with exploring (1) motives for borrowing in foreign currencies, (2) the exposure created by such financing policy, and (3) strategies for managing currency risk.
Suggested Questions for Advance Assignment to Students
1. Why should Carrefour consider borrowing in a currency other than euros?
2. Assuming the bonds are issued at par, what is the cost in euros of each of the bond alternatives?
3. Which debt issue would you recommend and why?
Hypothetical Teaching Plan
1. What is going on at Carrefour?
2. Is the Swiss-franc issue, at 3⅝%, a “no-brainer”?
3. What can a firm do to manage the exchange-rate risk of foreign-currency borrowing?
4. Using appropriate forward rates, what is the cost of borrowing in Swiss francs? British pounds? U.S. dollars? What should Carrefour do?
As reference material, broad empirical evidence of the managerial question in the case can be found in Matthew R. McBrady and Michael J. Schill, “Foreign currency denominated borrowing in the absence of operating incentives” Journal of Financial Economics 86 (October 2007): 145–177 and Matthew R. McBrady, Sandra Mortal, and Michael J. Schill, “Do firms believe in interest-rate parity?” working paper, Darden Graduate School of Business Administration, University of Virginia, Charlottesville.
