1. MSI Inc., a midsize European company, currently faces turbulent times. Shutdown as global answer to COVID-19 pandemic caused both severe revenue and profit declines as well as a high cash burn rate. The CFO assumes that without a significant change of circumstances the company faces a liquidity crisis by the end of July 2020. For this reason, both operational and financial measures are planned to attenuate pandemic's impact.
2. The finance department works out a detailed financial plan. The plan reveals a cash need for the following 18 months showing partly up-and-down swings. Acknowledging decreasing margins over the same period of time the CFO is concerned with the interest burden and fears MSI Inc. ability to cope with the uncertainty regarding future interest rates. In addition, he is worried about further potential risks causing multiple problems.
3. He asks his co-board member, the CRO, to put a paper together proposing measures to deal with interest rate risk as well as a summary regarding other potential risks for MSI Inc. given the current crisis. The CRO reaches out to you for support.
4. Devise a scenario with respect to the interest rate environment for the next 18 months. Discuss how you expect interest rates to change over the respective period and what reasons you see for this development. (All outcomes are possible but require a convincing argumentation. More than one scenario description is allowed but must be addressed in the following sections.)
5. Determine one or more potential strategies for MSI Inc. on how to deal with interest rate risk, i.e. what would be the desired exposure given the assumed interest rate development, and discussing the question if MSI Inc. should seek for fixed respectively floating rate financing.
6. What instruments can be applied in order to meet the desired exposure. Evaluate different aspects such as flexibility, risks, costs, timing, place of trade, etc.
7. Conclude everything within an executive summary.
8. Add an outlook including other financial and non-financial risks that are particularly
9. important to watch under current circumstances for MSI Inc.. Name and describe three financial or non-financial risks in addition to interest rate risk and explain their current importance.