The profit generated by the subsidiary in the U.K. is considered as...

The profit generated by the subsidiary in the U.K. is considered as a good source of money to be used to pay for the import of manufacturing equipment from Japan for the electronic component plant in the U.S.A. The CEO has already entered into negotiations with the Japan supplier of the equipment. The supplier is willing to provide HighTech 3 years to pay for the equipment that will be shipped to HighTech, but the payments must be conducted with quarterly instalments of 5,250,000 Yen by the U.K. subsidiary. This is why the CEO wants you to construct a currency swap arrangement where the profits of the U.K. subsidiary can be used to pay for the equipment. You have to apply the swap bank quotes to conduct this three year swap and also depict the swap graphically for the CEO to see how the swap will work.

Exchange rates: Spot

for $/JPY, the bid is 0.0094 and ask is 0.0095,

for $/Won, the bid is 0.0006 and ask is 0.0008,

for $/CAD, the bid is 0.7614 and ask is 0.7616,

for $/GPD, the bid is 1.3034 and ask is 1.3038,

for $/AU$, the bid is 0.7225 and ask is 0.7226,

for $/ZAR, the bid is 0.0606 and ask is 0.0607

Current borrowing interest rates on loans:

For USA the fixed is 0.640%, and libor is 0.130%,

for Japan, the fixed is 0.525% and libor is 0.015%,

for South Korea, the fixed is 1.164% and libor is 0.654% ,

for Canada, the fixed is 0.666% and libor is 0.156% ,

for UK, the fixed is 0.577% and libor is 0.067% ,

for Australia, the fixed is 0.612% and libor is 0.102%,

for South Africa, the fixed is 5.045% and libor is 4.535%

BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE

For $ in

year 1: Bid% is 0.630 and Ask% is 0.650,

year2: Bid% is 0.640 and Ask% is 0.660,

year 3: Bid% is 0.650 and Ask% is 0.670,

year 4: Bid% is 0.660 and Ask% is 0.680,

year 5: Bid% is 0.670 and Ask% is 0.690,

year 6: Bid% is 0.680 and Ask% is 0.700,

year 7: Bid% is 0.690 and Ask% 0.710,

year 8: Bid% is 0.700 and Ask% 0.720,

year 9: Bid% is 0.710 and Ask % is 0.730,

year 10: Bid % is 0.720 and Ask% is 0.740

For Yen in

year 1: Bid% is 0.515 and Ask% is 0.535 ,

year2: Bid% is 0.525 and Ask% is 0.545 ,

year 3: Bid% is 0.535 and Ask% is 0.555,

year 4: Bid% is 0.545 and Ask% is 0.565 ,

year 5: Bid% is 0.555 and Ask% is 0.575,

year 6: Bid% is 0.565 and Ask% is 0.585 ,

year 7: Bid% is 0.575 and Ask% 0.595,

year 8: Bid% is0.585 and Ask% 0.605 ,

year 9: Bid% is 0.595 and Ask % is 0.615,

year 10: Bid % is 0.605 and Ask% is 0.625

For Won in

year 1: Bid% is 1.154 and Ask% is 1.174 ,

year2: Bid% is 1.164 and Ask% is 1.184 ,

year 3: Bid% is 1.174 and Ask% is 1.194 ,

year 4: Bid% is 1.184 and Ask% is 1.204,

year 5: Bid% is 1.194 and Ask% is 1.214,

year 6: Bid% is 1.204 and Ask% is 1.224 ,

year 7: Bid% is 1.214 and Ask% 1.234,

year 8: Bid% is 1.224 and Ask% 1.244 ,

year 9: Bid% is 1.234 and Ask % is 1.254 ,

year 10: Bid % is 1.244 and Ask% is 1.264

For CAD$ in

year 1: Bid% is 0.656 and Ask% is 0.676 ,

year2: Bid% is 0.666 and Ask% is 0.686 ,

year 3: Bid% is 0.676 and Ask% is 0.696 ,

year 4: Bid% is 0.686 and Ask% is 0.706,

year 5: Bid% is 0.696 and Ask% is 0.716,

year 6: Bid% is 0.706 and Ask% is 0.726,

year 7: Bid% is 0.716 and Ask% 0.736 ,

year 8: Bid% is 0.726 and Ask% 0.746 ,

year 9: Bid% is 0.736 and Ask % is 0.756 ,

year 10: Bid % is 0.746 and Ask% is 0.766

For GPD in

year 1: Bid% is 0.567 and Ask% is 0.587 ,

year2: Bid% is 0.577 and Ask% is 0.597 ,

year 3: Bid% is 0.587 and Ask% is 0.607,

year 4: Bid% is 0.597 and Ask% is 0.617,

year 5: Bid% is 0.607 and Ask% is 0.627 ,

year 6: Bid% is 0.617 and Ask% is 0.637 ,

year 7: Bid% is 0.627 and Ask% 0.647 ,

year 8: Bid% is 0.637 and Ask% 0.657 ,

year 9: Bid% is 0.647 and Ask % is 0.667 ,

year 10: Bid % is 0.657 and Ask% is 0.677

For AU$ in

year 1: Bid% is 0.602 and Ask% is 0.622 ,

year2: Bid% is 0.612 and Ask% is 0.632 ,

year 3: Bid% is 0.622 and Ask% is 0.642 ,

year 4: Bid% is 0.632 and Ask% is 0.652 ,

year 5: Bid% is 0.642 and Ask% is 0.662 ,

year 6: Bid% is 0.652 and Ask% is 0.672,

year 7: Bid% is 0.662 and Ask% 0.682 ,

year 8: Bid% is 0.672 and Ask% 0.692 ,

year 9: Bid% is 0.682 and Ask % is 0.702 ,

year 10: Bid % is 0.692 and Ask% is 0.712

For ZAR in

year 1: Bid% is 5.035 and Ask% is 5.055,

year2: Bid% is 5.045 and Ask% is 5.065 ,

year 3: Bid% is 5.055 and Ask% is 5.075,

year 4: Bid% is 5.065 and Ask% is 5.085 ,

year 5: Bid% is 5.075 and Ask% is 5.095 ,

year 6: Bid% is 5.085 and Ask% is 5.105,

year 7: Bid% is 5.095 and Ask% 5.115 ,

year 8: Bid% is 5.105 and Ask% 5.125,

year 9: Bid% is 5.115 and Ask % is 5.135,

year 10: Bid % is 5.125 and Ask% is 5.145

Other summarised information:

United Kingdom subsidiary profits generated quarterly: £500,000

Import cost of equipment/machinery for the manufacturing of electronic components in the U.S.A: ¥63,000,000

Period of time that the components can be paid (in years) is 3

Number of payments per year is 4

Amount of each payment: ¥5,250,000

Question:

1. Calculation of the notional principal of the hedge in Japanese yen:

i) Payments to be conducted by HighTech subsidiary in the U.K. 0.5 mark

ii) How often? Monthly = 12/ Quarterly = 4/Semi-annual = 2 0.5 mark

iii) Swap bank Yen bid rate 0.5 mark

iv)Therefore, notional Yen principal calculated with information above 0.5 mark

2.Calculation of the notional principal of the hedge in British pounds:

a) Spot exchange rate $/Yen ask rate 0.5 mark

b) Spot exchange rate $/GBP bid rate 0.5 mark

c) Therefore, British pound notional principal calculated with the information above. 0.5 mark

d) Swap bank 3 year GBP ask rate 0.5 mark

e) U.K. subsidiary pays quarterly: 0.5 mark

f) GBP/Yen Exchange rate locked in for three years: 0.5 mark