8 If the northern branch and the southern branch worked together, the northern branch could loan its
Question:
8 If the northern branch and the southern branch worked together, the northern branch could loan its £15 million to the southern branch. Nevertheless, one could argue that the branches could not take advantage of interest rate differentials or expected exchange rate effects among currencies. Given the data provided in this example, would you recommend that the two branches make their short-term investment or financing decisions independently, or should the northern branch lend its excess cash to the southern branch? Explain.
Kent plc is a large UK firm with no international business. It has two branches within the UK, a southern branch and a northern branch. Each branch currently makes investing or financing decisions independently, as if it were a separate entity. The northern branch has excess cash of £15 million to invest for the next year. It can invest its funds in Treasury bills denominated in pounds or in any of four foreign currencies.
The only restriction enforced by the parent is that a maximum of £5 million can be invested or financed in any foreign currency.
The southern branch needs to borrow £15 million over one year to support its UK operations. It can borrow funds in any of these same currencies (although any foreign funds borrowed would need to be converted to pounds to finance the UK operations). The only restriction enforced by the parent is that a maximum equivalent of £5 million can be borrowed in any single currency. A large bank serving the international money market has offered Kent plc the following terms:
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