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

Determine the revenues earned from overseas markets, a) This refers a busin...

a) This refers a business, such as Palmolive-Colgate being able to sell the same product using the same marketing approach all over the world. It is used by firms with global brand

Calculate the risk premium and probabilities , Johnson & Johnson (JNJ) is t...

Johnson & Johnson (JNJ) is trading at 68.15 (Sep 12th 2012 close). JNJ is a large health care conglomerate. It has done well so far this year (though not as well as the market) and

Constructing index numbers, Constructing Index Numbers There are two a...

Constructing Index Numbers There are two approaches for constructing an index number namely the aggregates method and average of relatives method. The index constructed in eit

Financial mangement enviroment, 1. role financial intermediaries 2. nature ...

1. role financial intermediaries 2. nature and role of money markets

Case study.., This case has been framed in order to test the skills in eval...

This case has been framed in order to test the skills in evaluating a credit request and reaching a correct decision. Perluence International is large manufacturer of petroleum and

Benefits of niche and specialisation markets, a) Ltd. stands for ‘private l...

a) Ltd. stands for ‘private limited company', i.e. a business with limited liability with shares being issued only to friends and family with the approval of the board of directors

WACC, Keys Printing plans to issue a $1,000 par value, 10-year noncallable ...

Keys Printing plans to issue a $1,000 par value, 10-year noncallable bond with a 5.00% coupon, paid semiannually. It should sell at par. The company''''s marginal tax rate is 40.00

Show limitations of profit maximization, Q. Show Limitations of Profit maxi...

Q. Show Limitations of Profit maximization? The Profit maximization criterion is criticized on the following grounds: i) Quality of Benefits: Profit maximization approach ig

Trade credit is free credit agree or disagree, Trade credit is free credit....

Trade credit is free credit.  Do you agree or disagree with this statement?  Explain. Trade credit isn't free.  It has a value.  Who bears that cost depends on the conditions o

Determine the investment to maximize the return, Assume that the treasurer ...

Assume that the treasurer of a company has an extra cash reserve of $1,000,000 to invest for six months. The six-month interest rate is 8% per year in the U.S. and 6% per year in G

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