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 working capital cycle, Working capital cycle (operating/tradi...

Working capital cycle (operating/trading/cash cycle) It is the time between paying for goods supplied and final receipt of cash from their sale. It is desirable to keep cycle a

Determine the calculation of materiality, Determine the calculation of mate...

Determine the calculation of materiality For example: Turnover 1% -1.5% Net assets 1% -2% Net profit 2% -6% Whatever numbers are selected they would be based on r

Working capital, discuss the applicability of an operating cycle considerin...

discuss the applicability of an operating cycle considering broilers?

Definition of financial leverage, Q. Definition of financial leverage? ...

Q. Definition of financial leverage? One of the goals of planning an appropriate capital structure is to maximize the return on equity shareholders fund or else maximize the ea

Price/yield relationship in bonds, Bond Price is the purchase value o...

Bond Price is the purchase value of a bond. It can be priced either at a premium, discount or at par. It is important for the prospective buyer to know how to det

Define factors for investing in the emerging stock market, As an investor, ...

As an investor, what factors would you consider before investing in the emerging stock market of a developing country? Answer:  An investor in emerging market stocks requirements

Total cost of operating the business, Joe's ice cream stroe has to decide w...

Joe's ice cream stroe has to decide whether to shut down this winter or stay open. His projected revenue is $1,200 per week. He has fixed costs (Mortgage, taxes, insurance, etc.) t

Determine that the cost of equity is zero or not, If dividends paid to comm...

If dividends paid to common stockholders are not legal obligations of a corporation, is the cost of equity zero?  Describe your answer. Even though common stockholders do not com

Example on cash flow diagram, (a) A usual cash flow diagram will incorporat...

(a) A usual cash flow diagram will incorporate the following. If you are short the CDO and then you receive a fixed amount at the initial point t o . After that you make paymen

How to finance the exit of the financiers, How to finance the exit of the f...

How to finance the exit of the financiers The company would have to decide how to finance the exit of the financiers. Considerations comprise: (i)  Selling shares to the pub

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