Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?
A)Borrow francs in Switzerland, exchange for dollars and arrange a currency swap
B)Borrow francs in Switzerland, exchange for dollars and arrange an interest-rate swap
C)Borrow dollars in U.S., exchange for francs and arrange an interest-rate swap
D)Borrow dollars in U.S., exchange for francs and arrange a currency swap

Question

Quizplus · Accepted Answer

Nestlé can accomplish this by borrowing dollars in the U.S. market, where it finds better terms, then exchanging those dollars for Swiss francs to meet its needs. To manage the exchange rate risk associated with this transaction, Nestlé can arrange a currency swap, which will allow it to swap the principal and interest payments on the U.S. dollar loan for equivalent payments in Swiss francs, thus effectively obtaining a loan denominated in Swiss francs.

Nestlé Wishes to Obtain a Loan Denominated in Swiss Francs