Currency exchange risk management using swaps

Reference no: EM13831637

Activity: Currency Exchange Risk Management Using Swaps Bob is asking for an explanation. He has left you a note on your desk. BOB'S NOTE: I'm still not entirely comfortable with the debt issuance and hedging using the futures. I'm also concerned because we've been offered a $20 million commercial loan priced using 3-month Libor index+100bp. My concern is that most of the company's assets are generating fixed-rate returns. I decided to explore a swap possibility. After some preliminary research, using a money center bank's swap trading desk and its traders' connections, a possible deal has started taking shape. Another company would be willing to pay our company a floating rate payment priced at 3-month Libor+25bp, while our company would have an obligation to pay a fixed rate of 5.55% annualized, with quarterly settlements. I'm not overly concerned with the other party's reasons for requiring these payments, so we don't have to calculate the other party's final cost. But we do need to remember that fixed-rate swap payments are made on a semiannual basis, based on 30/90/180/360 Accrual Year Fraction, while floating-rate side payments are being made on a quarterly basis, based on Actual/360 Accrual Year Fraction. I'd like you to calculate what would be the ultimate cost of the loan to our company. For the purpose of this assignment you may ignore the carrying costs and the brokerage fees of the swap arrangement. Deliverables The basis of the ultimate cost of the payment to the lender to our company.

Activity: Currency Exchange Risk Management Using Swaps

Bob is asking for an explanation. He has left you a note on your desk.

BOB'S NOTE:
I’m still not entirely comfortable with the debt issuance and hedging using the futures. I’m also concerned because we’ve been offered a $20 million commercial loan priced using 3-month Libor index+100bp. My concern is that most of the company’s assets are generating fixed-rate returns. I decided to explore a swap possibility.

After some preliminary research, using a money center bank’s swap trading desk and its traders’ connections, a possible deal has started taking shape. Another company would be willing to pay our company a floating rate payment priced at 3-month Libor+25bp, while our company would have an obligation to pay a fixed rate of 5.55% annualized, with quarterly settlements. I’m not overly concerned with the other party’s reasons for requiring these payments, so we don’t have to calculate the other party’s final cost. But we do need to remember that fixed-rate swap payments are made on a semiannual basis, based on 30/90/180/360 Accrual Year Fraction, while floating-rate side payments are being made on a quarterly basis, based on Actual/360 Accrual Year Fraction.

I’d like you to calculate what would be the ultimate cost of the loan to our company. For the purpose of this assignment you may ignore the carrying costs and the brokerage fees of the swap arrangement.

Deliverables

The basis of the ultimate cost of the payment to the lender to our company.

TIPS FOR THIS ACTIVITY:

Please disregard all the steps except for this one

put together an algebraic expression for the cost of the lender. If your algebraic expression is correct, you will realize that no calculations of the actual Libor rate are needed

Example with the Prime rate: Prime+50 bp-3.75% +4% -Prime -20 = something like that, but, certainly with Libor.

Reference no: EM13831637

Questions Cloud

Describe how the pan american games were established : describe how the pan American games were established

Calculate the customer level operating profit : Calculate the customer level operating profit for each of the above merchandising firms based on the actual number of orders written and prepare a customer profitability analysis ranking the firms from most to least profitable showing the level of ..

Which of the following is an example of a sentence fragment : Which of the following is an example of a sentence fragment

Develop detailed knowledge of shrm needs of an organisation : Develop detailed knowledge of the SHRM needs of an organisation. Reflect on how organisations can effectively communicate appropriate strategies to deal with the SHRM needs to the organisation.

Currency exchange risk management using swaps : Activity: Currency Exchange Risk Management Using Swaps Bob is asking for an explanation. He has left you a note on your desk. BOB'S NOTE: I'm still not entirely comfortable with the debt issuance and hedging using the futures. I'm also concerned bec..

What role do reviewing or appellate courts play : What role do reviewing or appellate courts play in the judicial process? How do they differ from trial courts

Shipping and warehousing departments to china : Prepare a paper on Outsourcing the IT, shipping and warehousing departments to China

Why this might be good practice to limit it review authority : In fact, the Supreme Court hears very few of the cases presented to it. Can you think of why this might be a good practice to limit its review authority

The december cbot treasury bond futures contract : The December CBOT Treasury bond futures contract is quoted at 92-19. If annual interest rates go up by 1.50 percentage points, what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the nearest whole dollar.)

User Account

All Pages