Question

Assume that Credit Suisse, a world leading financial institution headquartered in Switzerland, borrows €100,000,000 for ten years commencing on January 1, 2019 for its operation in the Eurozone. According to the terms of the loan, Credit Suisse pays interest at the end of each year and pays back the principle at the end of ten years. On the borrowing date, the relevant financial information is: Spot = SFr1.20/€ (SFr: Swiss franc) i€ = 5.0% iSFr = 3.0% Suppose that on December 31, 2019, the spot rate is SFr1.00/€. When Credit Suisse’s euro debt is translated to Swiss francs at the end of 2019, how much is the translation gain or loss (do not consider the interest expense; if it is a loss, put a negative sign “-” in your answer)? Your answer: SFr

Answer 1

Credit Suisse having Headquarters at Switzerland
Amount Borrowed	€      100,000,000.00
Tenure of loan	10 years
Date of taking loan	January 1st 2019
Spot rate for Euro on date of borrowing	1.2 SFr/Euro
Euro Interest Rate	5%
Swiss franc Interest Rate	3%
Forward rate based on Interest Parity Theory at the end of 2019 =	Spot Rate x (1 + Swiss Interest rate)/(1 + Euro Interest Rate)
= 1.2*(1.03/1.05) =	1.177143	SFr/Euro
Theoritical converted Principal Amount in Swiss Franc at the end of 2019	117,714,300.00 fr.
Spot rate for Euro on date of 31 Dec 2019 =	1 SFr/Euro
Actual Principal amount in Swiss Franc at end of 2019	100,000,000.00 fr.
Gain or loss on translation of principal ( amount in SFr)	-    17,714,300.00 fr.