Question

Determine 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.

Answer 1

Some countries have a large supply of funds available compared to the demand for funds, which can cause relatively low interest rates. Borrowers may attempt to borrow funds from creditors in these countries because the interest rate charged is lower. A country with relatively low interest rates is often expected to have a relatively low rate of inflation, which can place upward pressure on the foreign currency's value and offset any advantage of lower interest rates. The relation between expected inflation differentials and currency movement is not precise. However, so some borrowers will choose to borrow from a market where nominal rates are low, since they do not expect an adverse cureency movements to fully offset this advantage.