The Financial Analysis of Barcelona Brasseries Case Study

The Financial Analysis of Barcelona Brasseries - Case Study Example In the case study, hedging, as suggested by the private banker, would make sense for Barcelona Brasseries S.L. The economic environment is characterized by floating interest rates all through, with low margins. Given the prevailing economic environment, hedging the interest rates may be beneficial. The prevailing interest rates are low, and the company’s investment yield is quite low. Since the company has recently obtained additional locations all through Barcelona, for 1,000,000 Euros holding mortgage loan(s) will, therefore, result in higher earnings. Such a rise in income is caused by the increased interest earnings. In the example provided, the interest rate –swap has been set into a three-month floating rate system. The three-month floaters stretch more than it can if invested in securities and there are no capped rates (Hollis 2011). The company’s performance will be better if the interest rates increase. Suppose the rates fall, the three-month floater wil l have a performance similar to that which was predicted. However, the low rate may be quite inconvenient. Deventer and Imai (2013, p.113) note that there are some dangers the family may have to take into account when implementing the hedging of interest rate risks. There is a need for constant and consistent rearrangement. For example, a hedge with an eight percent effective duration would be sufficient to hedge a balance sheet with 31-year mortgage loans. However, seven years later, the hedge diminishes ineffective duration and may need to be rearranged with more hedges as the earlier former hedges mature. In most cases, this rearrangement needs superior modeling methods. In summary, the hedging of interest rate risk and the application of derivatives are useful method Barcelona Brasseries Inc. may consider utilizing.