Question

What are the international sources of financing available to the FIAT FCA? Using the Internet or other sources of data, compare the interest rate to the foreign interest rate over the last year. Which interest rate is typically higher? Explain how you might be able to reduce your exposure to exchange rate risk by borrowing long-term funds denominated in euros. What is the government's borrowing rate in Italy? Is the rate higher or lower than the government rate in Italy? Identify and discuss whether the company is using currency swaps? Is the debt fixed or floating rate? Is FIAT FCA using interest rate swaps?

Answer 1

Fiat Chrysler Automobiles (Fiat FCA) is the latest joint venture between The Italian firm Fiat and the American Firm Chrysler, when they merged in 2014. FCA is primarily an automobile firm and one of the largest automobile makers of the world. FCA has found some of the big investors as their key financers in FCA US, which is a member of the FCA group. This family has invested more than $ 50 million in FCA. Their investment is with the purpose to develop the automobile capability of FCA. Another investor in the FCA is the Agnelli family. This family owns nearly 30% of the total holdings of FCA and it also controls about 45% of the holdings.

The rate of interest that Fiat FCA has had to bear for its investments has been huge from the international sources. FCA has taken the investments at an interest of about 12.3% interest rate from the International market. However, the prevailing interest rates in the home markets are about 8 to 9%. But, due to lack of local investors, FCA had to primarily depend on the International investors and thereby has had to bear huge interest burden.

  When Funds are received from International sources, they are exchanged at the currently prevailing exchange rates. In the current market situation, as has been seen over a few years, the economic situations have been volatile and hence the markets have not been able to maintain a static exchange rate. In the shorter run, the exchange rates have sometimes even touched nearly 1.8 times of the existing exchange rates among some countries. However, in the longer run, it is expected that the volatile nature of the market economies may die down, thereby stabilizing the exchange rate. Hence it is advisable to borrow from International sources for the longer run.

The Italian market is in a highly uncertain condition as the borrowings of the Italian Government has increased many folds. Currently, the Italian Government’s interest rate ion borrowings are 6.53 %. This rate of interest rate is much higher, when it is compared to the bowing interest it has had to pay in the last 9 years. Therefore, there has been a fear in the investors in Italy, that the Italian economy is going through a very tough phase of economic disinvestment and turmoil.

  The Government of Italy has been using currency swap, thereby it is borrowing the funds at an exchange currency of the lender country and paying it back in its own currency. This agreement has to some extent helped the Italian Government to pay off the borrowings with comparative ease. The Interest rates in the case of currency swaps has however been more, which has also acted negatively for the Government. The rate keeps floating. Fiat FCA has been trying to implement interest rate swaps too, however, it has not been totally successful in its implementation. However, all thee steps of reduction of its overall debt has not been too successful.