Carrefour S.A. Case Write-up In order to finance its ongoing expansion, Carrefour decided to issue EUR750 million 10-year bond through the eurobond market. Investment banks, like Morgan Stanley and UBS-Warburg had suggested that instead of issuing the bond with EUR, Carrefour could borrow British sterling pounds this time by taking the advantage of a temporary borrowing opportunity in the currency. Carrefour also faced three other alternatives of issuance: the bond could be issued at a coupon rate of 5.25% in euro, 3.625% in Swiss francs, or 5.5% in USD.
There are several considerations that Carrefour should take when it evaluated which currency it should issue the EUR debt. According to relative PPP equation,
%ΔS(foreign currency/domestic currency)= π(foreign country prices) - π(home country prices)
It says that the percent change in the foreign-domestic exchange rate is equal to the difference between the inflation rate in foreign country and the inflation rate in home country. The currency of a high inflation country will depreciate relative to the currency of a low inflation country by the difference in the two inflation rates. If Carrefour sets Euro as domestic currency, the country with the highest inflation rate, its currency would be expected to depreciate with the greatest amount. As it has shown in the case Exhibit 4, U.K. has the highest projected inflation rate in next 3 years compares to other countries, therefore, it’s more favorable to borrow in British pounds in order to take U.K’s advantage of borrowing opportunity. If Carrefour makes its decision based on simply comparing coupon rates, British currency debt had the highest rate, and Swiss francs gave the lowest rate. It seemed reasonable to issue the debt in CHF, but this decision would be no brainer. Carrefour’s investment banks had suggested Carrefour to make its decision by focusing on the