Business Case Studies & Business Publications

Hedged Cost of Funds and Interest Rate A...

Lipson, Marc L.

Technical Note

Hedged Cost of Funds and Interest Rate Arbitrage

Lipson, Marc L.

F-1565 | Published March 10, 2008 | 12 pages Technical Note

Collection: Darden School of Business

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This technical note provides an overview of interest rate parity and the hedged cost of international borrowings. The note describes the essential steps to hedge international borrowings with forward contracts and describes in detail the link between forward rates and interest rates and what drives that relationship.

The learning objective for this technical note is to explain the central concepts related to the calculation and drivers of the cost of a hedge foreign currency borrowing. The note explains the forecast of exchange rates based on parity conditions, illustrates the resulting forecast of financing flows and the calculation of a hedge cost of funds, and discusses the economic drivers of foreign borrowing costs.