GRETZ TOOL COMPANY SUPPLEMENTAL CASE SOLUTION

PREPARED BY
Salau Abdul Malik Olarinoye Nurul Huda Binti Yahya 810115 810572

Razlina Binti Romli

Aliana Shazma Amir Binti Amir Nur Diyana Binti Zamro

806340
813298 812395

SUBMISSION DATE : 1 MARCH 2013

SOLUTION FOR QUESTION A

The way that could be taken by Citigroup in facilitating Gretz flow of funds are as follows: Loan

a.Short-term financing
Citigroup may act as a creditor to Gretz to provide short-term loans in any currency required by international money market.

b.Medium-term financing
Citigroup may also provide a medium-term loan to Gretz in any currency required by international credit market. In this kind of financing, Citigroup is again will act as a creditor to Gretz.

CONTINUE
The way that could be taken by Citigroup in facilitating Gretz flow of funds are as follows:

c.Long-term financing
Citigroup may help through placing the bonds issued by Getz into the international bond market. In this case, Citigroup no longer acting as a creditor but as an intermediary Foreign Exchange Gretz able to obtain any required currency in the foreign exchange market by Citigroup. Investment Citigroup may also help Gretz by placing new stocks issued in the foreign exchange market.

SOLUTION FOR QUESTION B

Some characteristic that might be considered by British subsidiary are: i. Exchange rate risk this exchange rate risk represents the potential for the value of bonds to decline from the investors perspective. This can be applied to this case due to Gretz Tool Company has more than one subsidiaries and facing with this situation. ii. Credit risk this company need to consider against its potential for default, whereby interest or principal payments to investors are suspended temporarily or permanently.

iii. Interest

rate risk this can be seen for a long term interest rates for the company. The company in this case mentioned that it is operated in medium term. iv. Liquidity risk this company should consider the potential value of bonds to decline at time they are for sale because it is not consistently as active market for the bonds. The determination of which currency to borrow depends on the information which in terms of British pounds sterling, it may results on the different currency. Moreover, the convertion need to be made and as well as the risk should be taken into consideration. In term of Japanese Yen, it is low in interest but in medium term,as for a long term basis, it will keep fluctuating.

SOLUTION FOR QUESTION C

Some condition that might be considered by Japanese subsidiary of Gretz are : 1) Political short-term gain increasing interest rates can give the economy a long-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates so as it happen in Japan. 2) Deferred consumption When money is loaned by Japanese delays spending the money on consumption goods. Since according to time preferences theory people prefer goods now to goods later, in a free market there will be a positive interest rate.

3. Inflationary expectations: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower which is Japanese company needs to compensate the lender for this. 4. Alternative investments: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds. 5. Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.

Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender 6. Liquidity preference : generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail. If Japanese subsidiary prefer to have Liquidity preference : their resources available in a form People to have their resources available that can immediately beprefer exchanged, rather than a form that takes time in a form that can immediately be exchanged, or money to realize. rather than a form that takes time or money to realize. Taxes: Because some of the gains from interest 7. Taxes: may be subject to taxes, the lender may insist Because some of the gains may on a higherfrom rate tointerest make up for this be loss.subject to taxes, the

lender may insist on a higher rate to make up for its (Japanese) loss.

ALL OF THE GROUP MEMBERS WERE EQUALLY PARTICIPATED IN THIS CASE STUDYS SOLUTIONS