- Determine the key reasons why a multinational corporation might decide to borrow in a country such as Brazil, where interest rates are high, rather than in a country like Switzerland, where interest rates are low. Provide support for your rationale.
Respond:
Multinational corporations consider inflation, interest rates, and exchange rates when making decisions to borrow. Inflation rates impact future production costs. Inflation also has a major effect on interest rates and exchange rates.
The currency in countries with higher inflation rates than the United States will depreciate over time against the dollar. This has occurred in Brazil. In contrast, the currency in Switzerland has appreciated against the dollar due to lower inflation rates (Ehrhardt, 1). Inflation rates affect interest rates.
The interest rates in Brazil and Switzerland are impacted by inflation rates. As a result, countries such as Brazil with higher inflation rates have higher interest rates. In countries such as Switzerland with lower inflation rates, interest rates are lower (Ehrhardt, 1).
It may be appealing for multinational corporations to borrow in Switzerland due to lower interest rates. This is not always the best plan. The interest rates today may be lower due to lower inflation rates, but the currency will likely appreciate in the future leading to the possibility of debt (Ehrhardt, 1). Comparably, multinational corporations should not avoid borrowing in Brazil because of high-interest rates. The currency will likely depreciate in the future which would make borrowing relatively inexpensive (Ehrhardt, 1).
