Case Study
MSI Inc., a midsize European company, currently faces turbulent times. Shutdown on a
continued basis as global answer to COVID-19 pandemic caused both severe revenue and
profit declines as well as a high cash burn rate. The CFO assumes that without a significant
change of circumstances the company faces a liquidity crisis by the end of June 2021. For this
reason, both operational and financial measures are planned to attenuate pandemic’s impact.
The finance department works out a detailed financial plan. The plan reveals a cash need for
the following 18 months showing partly up-and-down swings. Acknowledging decreasing
margins over the same period of time the CFO is concerned with the interest burden and fears
MSI Inc. ability to cope with the uncertainty regarding future interest rates. In addition, he is
worried about further potential risks causing multiple problems.
He asks his co-board member, the CRO, to create a report proposing measures to deal with
interest rate risk as well as a summary regarding other potential risks for MSI Inc. given the
current crisis. The CRO reaches out to you for support.
Assignments
1. Devise a scenario with respect to the interest rate environment for the next 18 months.
Discuss how you expect interest rates to change over the respective period and what
reasons you see for this development. (All outcomes are possible but require a convincing
argumentation. More than one scenario may be described. Apply the scenario(s) you
picked when answering questions 2 and 3.)
2. Determine one or more potential strategies for MSI Inc. on how to deal with interest rate
risk, i.e., what would be the desired exposure given the assumed interest rate
development, and discuss the question whether MSI Inc. should aim for fixed-rate or
floating rate financing.
3. Which instruments can be used in order to meet the desired exposure. Evaluate different
aspects such as flexibility, risks, costs, timing, place of trade, etc.
4. Conclude all results in one executive summary.
5. Add an outlook including other financial and non-financial risks that are particularly
important to watch under current circumstances for MSI Inc.. Name and describe three
financial or non-financial risks in addition to interest rate risk and explain their current
importance.
