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Chapter 5: Q12DQ (page 680)

What are the differences between a parallel loan and a fronting loan?

Short Answer

Expert verified

A parallel loan is a four-party agreement among two parent companies in different countries obtains money in their own currency and lend the money to the other local subsidiary. On the other hand, a fronting loan is an overseas subsidiary in which one parent company, an intermediary, and usually a large international bank goes through the financial system.

Step by step solution

01

Loan

A loan is the amount of money that is borrowed and expected to be paid in the future with specified interest.

02

Difference between parallel loan and fronting loan

Basis

Parallel loan

Fronting loan

Meaning

An agreement between two parent companies located in two different countries whose subsidiary companies are located in each other鈥檚 country. In this case, both the parent companies take a loan of an equivalent amount in local currency and provide it to each other鈥檚 subsidiary companies. It is known as a parallel loan.

A fronting loan can be defined as the loan granted to the foreign subsidiary by the parent company through the involvement of a financial intermediary.

Foreign fund

Such an agreement does not require any movement he foreign funds.

Such loan requirement movement of foreign funds.

Financial institution

Such a loan does not require any involvement of the financial institution.

A financial institution such as a bank is involved in this loan process.

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You are the vice president of finance for exploratory resources, headquartered in Houston, Texas. In January 20X1, your firm鈥檚 Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. \(0.8995/ Canadian dollars and the Canadian currency was selling at a discount in the forward market. The June 20X1 contract (face value = C\)150,000 per contract) was quoted at U.S. $0.8930/ Canadian dollar.

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