Question

Based on case "Carrefour S.A.", answer the following question

Pinduoduo (PDD) is trying to issue a 5-year note. Because it is a Chinese firm listed in the US, it wants to test the eurobond market by considering raising money in USD. The current exchange rate between Chinese RMB to USD is 0.14, i.e. every Chinese RMB can be exchanged to 0.14 USD. The term structure in China and US can be found in the following table for the next 5 years:

	CHN	USA
1 year	1.167%	0.17%
2 year	1.362%	0.20%
3 year	1.514%	0.24%
4 year	1.735%	0.29%
5 year	1.896%	0.34%

After some negotiation, Pinduoduo can borrow in RMB at a rate of 3.7% (annual coupon) for 5 years, and 2.2% (annual coupon) in USD. Assuming interest rate parity, should PDD issue in USD or RMB?

Answer 1

As per Interest Rate parity theory, 1+rd/ 1+rf = F/S
rd= Interest rate in domestic country,
rf = Interest rate in Foreign country,
F = Forward Rate
S = Sport Rate

Spot Rate = RMB/USD = 0.14  
which means, USD is the asset and China is the domestic country.

So, (1+0.037)/ ( 1+0.022) = F/ 0.14
F= 0.142 = RMB/USD

As we have seen the China currency ( RMB) will aprreciate, and Dollar will depreciate.
So its better to raise money in Dollar at the first place.

For eg. if the company has borrowed $1400 , the company will get RMB 10000.
At the time of repayment, the company needs to pay 1400/0.142 = 9859.

So its better to raise money in Dollars