Since its inception in a small French town, “hypermarket” Carrefour, has transformed itself over 40 years into Europe’s most prolific retailer. Now globally, Carrefour has a presence in 26 countries, operating over 5,200 stores. By the summer of 2002, Carrefour boasted total sales of EUR53.9 billion. The company continues to expand internationally, but with further acquisitions comes the need for more funds. In order to finance this expansion, Carrefour finds itself in the position of needing to leverage a 10-year bond for debt financing of EUR750 million. Though investment bankers have recommended borrowing in British pounds sterling the company compares their Eurobond options across the EUR, GBP, CHF, and USD.
As Carrefour operates in a wide range of nations, it remains controlled in its management of exchange rate risk. They mediate the risk by operating mainly within the local economy of each country in which they operate. For example, they avoid outsourcing materials and instead source products domestically. Concerning any imported goods they need, Carrefour would choose to pursue forward contracts on that certain currency. This strategy has led to Carrefour hosting a high financial leverage ratio. This ratio is high because the company uses debt and other liabilities to fund its assets. Carrefour boasts a proportion of EUR8 billion in equity to EUR13.5 billion in borrowings, a strategy that is risky.
In determining which currency to choose for their debt financing, Carrefour must consider a number of factors including currency inflation, interest rates, and exchange rate environments. The first step taken is to convert the EUR750 million into each of the other respective currenc...