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

Leverage, Evaluate the importance of leverage in financial management of a ...

Evaluate the importance of leverage in financial management of a small scale company

Section C, Honey Well company is contemplating to liberalize its collectio...

Honey Well company is contemplating to liberalize its collection effort. It''s present sales are 1000000 and it''s average collection period is 30 days, it''s expected variable c

How are financial trades made in an over-the-counter market, How are financ...

How are financial trades made in an over-the-counter market? Discuss the role of a dealer in the OTC market. In difference to the organized exchanges, which have physical locat

Public provident fund, Public Provident Fund (ppf) The Public Provident...

Public Provident Fund (ppf) The Public Provident Fund (PPF) scheme was started in 1968-69 with the aim to provide a financial instrument to workers in the unorganized sector to

Suggestion regarding Credit limit. Should it be approved or, Suggestion reg...

Suggestion regarding Credit limit. Should it be approved or not, what should be the amount of credit limit that electronics give to Booth Plastics.

Explain the concepts of planning the work, Explain the concepts of Planning...

Explain the concepts of Planning the work Determine scope and objective of the audit (to verify assets, to check adequacy of internal controls etc...). Ensuring appropr

Difference euronote market and euro medium term note market, What is the di...

What is the difference between the Euronote market, the Euro-medium-term-note market, and the Eurocommercial paper market? Answer:  Euronotes are short-term notes guarantees by

Why investment decision depend on financing decision, Why investment decisi...

Why investment decision depend on financing decision All these decisions interact, investment decision cannot be taken without taking the financing decision, working capital de

Employees’ provident fund, Employees' Provident Fund (EPF) The Employee...

Employees' Provident Fund (EPF) The Employees' Provident Fund (EPF) Act, 1952 is the earliest legislation related to old age income security in India. It is a contributory prov

Foreign exchange - maximum loss, Q. Foreign exchange - Maximum loss? Fr...

Q. Foreign exchange - Maximum loss? From Marton's point of view an adverse outcome is depreciation of the dollar against sterling as this lowers its income when converted into

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