Case study - japanese loans and forwards, Financial Management

Assignment Help:

Japanese banks borrow in yen and purchase spot dollars from their Western counterparties. Therefore the Western banks are left holding the yen for the time of the loan (three months in this case).

The major point is here. In an FX transaction in this case purchasing Yen the purchased currency may have to be kept overnight in a Yen denominated account. The FX is by definition not euro Yen therefore these accounts have to be in a bank Japan. A few of these will be Japanese banks.

A nostro account is one that a bank embraces with a foreign bank. (In this case London banks embrace Nostro accounts with Japanese Banks in Tokyo for example.) Nostro accounts are generally in the currency of the foreign country. Presume an American bank called Bank A buys Euros from a European bank 'Bank B'. These Euros can't leave Europe. They will be forwarded to a European bank say Bank of Europe to be kept in a Deposit account for the use of Bank A. This would be a nostro account of Bank A. Bank A will have alike nostro accounts in Australia, Japan, and so on to trade Dollar against Yen or Australian dollar.

This permits for easy cash management because the currency does not need to be converted. Incidentally nostro is imitative from the Latin term 'ours'.

The Western banks may not be willing to hold the Yen in their nostro accounts because this requires them to hold capital against the yen for regulatory purposes.

Japanese banks being further risky, risk managers may as well be against holding too much in a Nostro account in Japan. Note that banks control in an environment where others have credit lines against each other. The Headquarters mayn't want a currency desk to have exposure to Japanese Banks beyond a certain limit. This may perhaps force Western banks to dump the excess Yens at a negative interest rate.

By not holding the yen the Western banks might potentially lose significant sums if the bank where the Nostro account is held defaults. For this reason they may favour to dump the yen deposits and earn negative yield for the reason that they can be more than compensated with their earnings from the spot-forward trade.

Going by exchange market conventions the fixed payments for fixed payer swaps are:

• 100 × .0506 × 1 = USD 5.06 million per year

• 100 × .0506 × 1 = Euro 5.06 million per year

Fixed payments for the fixed receiver exchanges are:

• 100 × .0510 × 0.5 = JPY 2.55 million per 6 months

• 100 × .0510 × 0.5 = GBP 2.55 million per 6 months


Related Discussions:- Case study - japanese loans and forwards

What is risk free rate of return, What is risk free rate of return Ther...

What is risk free rate of return There is a 'risk free rate of return' (also known as time preference rate) which is used to compensate for the loss of not being able to invest

Evaluation of money-market hedge, Evaluation of money-market hedge Expe...

Evaluation of money-market hedge Expected receipt after 3 months = $300000 Dollar interest rate over three months = 5.4/ 4 = 1.35% Dollars to borrow now to have $300000 l

What is usual approach of capital structure, Q. What is usual Approach of c...

Q. What is usual Approach of capital Structure? Ans. Traditional Approach: - The traditional approach establishes middle among the Net Income approach and the Net Operating Inc

Provisions for paying off bonds, The issuer of the bond has to repay ...

The issuer of the bond has to repay the bondholders the principal by the stated maturity date. This can be repaid by the issuer in one lumpsum payment at the matu

Please identify the largest potential threat, Using Southwest Airlines as a...

Using Southwest Airlines as an example, please identify the largest potential threat, the strategy employed, and what types of capital budgeting projects would be used to operation

State what is average cost, State what is Average cost Average cost rep...

State what is Average cost Average cost represents weighted average of the costs of each source of fundsemployed by enterprise, weights being the relative share of each source

#title.operating cycle., discuss the applicability of an operation cycle in...

discuss the applicability of an operation cycle in a vegetation business

Five cs of obtaining credit, Five Cs of Obtaining Credit The five ...

Five Cs of Obtaining Credit The five crucial parts lenders examine previously issuing credit include: 1. Character.    This is a calculation of the borrower's integrit

Compounding technique for calculating time value of money, COMPOUNDING TECH...

COMPOUNDING TECHNIQUE is the method of calculating the future values of cash flows and involves calculating compound interest.  Under this process, interest is compounded when the

Function of the investment decision, Q. Function of the Investment decision...

Q. Function of the Investment decision? Investment decision related of the selection of the fixed assets. the assets can be acquired fall into two board groups i) long terms

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd