Foreign Currency Loans

Paper Summary:

The paper discusses how foreign exchange loans always present a risk to the borrower. The paper focuses on a case involving the American Rondo Company taking out a foreign currency loan with the Swiss Bank. The paper relates that if the Rondo company is careful to monitor and evaluate changes in the market, or it goes through a managed foreign currency loan, many of these risks can be reduced, if not eliminated.

From the Paper:

"A foreign currency loan is a loan in which is repayable in a currency other than the currency of the country in which the borrower is a resident in. In the Rondo Company case sample, the company has a financing option to take out a foreign currency loan with the Swiss Bank. Typically the interest rate charged on a foreign currency loan is based on the interest rates applicable to the currency that the loan is denominated, or issued, (in this case, the Swiss Franc) and not the interest rates that apply to the currency of the borrower's country of residency (The U.S. Dollar). Under this scenario, the foreign currency loan with the Swiss Bank could be beneficial because the interest rate on the foreign currency in which the loan is based on is significantly lower than the rate that the borrower can get on a loan borrowed in his or her own resident country's currency system."

Sample of Sources Used:

• Almekinders, Geert J. (1995): Foreign Exchange Intervention: Theory and Evidence. New York: Edward Elgar Publishing, Inc.
• Eijffinger, Sylvester. Foreign Exchange Intervention: Objectives and Effectiveness. New York: Edward Elgar Publishing, Inc.

More papers on Foreign Currency Loans:

• Cause and Effect Essay # 110514 : "The Asian Currency Crisis"
• Essay # 60133 : "Financial Derivatives"
• Research Paper # 13515 : "South Korea's 1997 Financial Collapse"

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