A Note on Foreign Borrowing Costs

Abstract

This paper describes a relatively simple algorithm to estimate the effective after-tax cost of different short term debt or time deposit options available to foreign affiliates of multinational companies. Cost or return is measured from the parent company's point of view taking into account nominal interest rates, exchange rates, relative taxes, and the accounting rules for computing translation gains and losses. Because these variables, with the exception of future exchange rates, can be known with almost complete certainty at the time of the decision, it is argued that a risk-adverse corporate treasurer should eliminate the remaining currency risk by systematically covering foreign currency loans or deposits.