Question

Open Trading Company is a Hong Kong-based MNC. The company will be out of cash and needs HK$1,000,000 loan for a year period. Within a year, the company has maturing receivables to repay the loan, which is dominated in Hong Kong dollars. As the financial controller of Open Trading Company, you are requested to follow up two issues (a & b) below:

(a) There are two financing options for Open Trading Company. Option 1: borrowing a loan denominated in New Zealand dollars at 8%; the New Zealand dollar is expected to depreciate against the Hong Kong dollar by 4% in a year. Option 2: borrowing a loan denominated in Japanese yen at 6%; the yen is expected to appreciate against the Hong Kong dollar by 2% in a year. Based on the effective financing rate, suggest the appropriate option for the Company. Explain your suggestion.

(b) To avoid any cash problems happen again, the Open Trading Company should improve the international cash management. Draft and elaborate two techniques used to optimize cash flows.

Answer 1

Loan amount= HK$1,000,000.

We can calculate the future values to know the amounts to be paid.

Option 1

Therefore as we are converting HK$ into Nz $, Loan amount to pay is 1,000,000*(1.08)=1,080,000.

Now depreciation, 4% therefore 1,080,000/1.04=1,0381,462.

Option 2

Japanese yen $1,000,000 *(1.06)=1,060,000

Apreciates by 2%=1,060,000*(1.02)=HK$1,081,200

Therefore Option 1 is better than Option 2.

b) The Open Trading Company can improve international cash management can Invest in liquid securities (readily convertible into cash) some of the liquid instruments are

-Liquid instruments such are Certificate of Deposits or short-term notes such as T-bill can be readily converted to cash.

-Fixed income security on locking the currency so that the fluctuations on currency can be avoided.