3. The profit generated by the subsidiary in the U.K. is considered as a good source...

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3. 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. Relevant information, that you will require are provided below: Exchange rates: $/JPY $/Won $/CAD $/GPD $/AUS $/ZAR Current borrowing interest rates on loans: USA Japan South Korea Canada UK Australia South Africa Spot Bid Ask 0.0094 0.0095 0.0006 0.0008 0.7614 0.7616 1.3034 1.3038 0.7225 0.7226 0.0606 0.0607 Fixed Libor 0.640% 0.130% 0.525% 0.015% 1.164% 0.654% 0.666% 0.156% 0.577% 0.067% 0.612% 0.102% 5.045% 4.535% BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE S Yen Won CAD$ GPD AUS ZAR Years Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% 1 0.630 0.650 0.515 0.535 1.154 1.174 0.656 0.676 0.567 0.587 0.602 | 0.622 | 5.035 5.055 2 0.640 0.660 0.525 0.545 1.164 1.184 0.666 0.686 0.577 0.597 0.612 0.632 5.045 5.065 3 0.650 0.670 0.535 0.555 1.174 1.194 0.676 0.696 0.587 0.607 0.622 0.642 5.055 5.075 4 0.660 0.680 0.545 0.565 1.184 1.204 0.686 0.706 0.597 0.617 0.632 0.652 5.065 5.085 5 0.670 0.690 0.555 0.575 1.194 1.214 0.696 0.716 0.607 0.627 0.642 0.662 5.075 5.095 6 0.680 0.700 0.565 0.585 1.204 1.224 0.706 0.726 0.617 0.637 0.652 0.672 5.085 5.105 7 0.690 0.710 0.575 0.595 1.214 1.234 0.716 0.736 0.627 0.647 0.662 0.682 5.095 5.115 8 0.700 0.720 0.585 0.605 1.224 1.244 0.726 0.746 0.637 | 0.657 0.672 0.692 5.105 5.125 9 0.710 0.730 0.595 0.615 1.234 1.254 0.736 0.756 0.647 0.667 0.682 0.702 5.115 5.135 10 0.720 0.740 0.605 0.625 1.244 1.264 0.746 0.766 0.657 0.677 0.692 0.712 5.125 5.145 Other summarised information: United Kingdom subsidiary profits generated quarterly: Import cost of equipment/machinery for the manufacturing of electronic components in the U.S.A: 500,000 63,000,000 Period of time that the components can be paid (in years) 3 Number of payments per year Amount of each payment: 4 5,250,000 Paragraph > Styles Question 3: (16 marks) a. 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. Workings: Calculation of the notional principal of the hedge in Japanese yen: Payments to be conducted by HighTech subsidiary in the U.K. How often? Monthly = 12/ Quarterly = 4/Semi-annual = 2 Swap bank Yen bid rate Therefore, notional Yen principal calculated with information above Provide your answers in the cells below Marks 0.5 mark 0.5 mark 0.5 mark 0.5 mark Calculation of the notional principal of the hedge in British pounds: Spot exchange rate $/Yen ask rate Spot exchange rate $/GBP bid rate Therefore, British pound notional principal calculated with information above. Swap bank 3 year GBP ask rate U.K. subsidiary pays quarterly: Provide your answers in the cells below Marks 0.5 mark 0.5 mark 0.5 mark 0.5 mark 0.5 mark Question 3 continued: Complete the diagram below to show the swap transaction graphically by inserting the correct interest rate or currency values below: (6 marks) Japanese exporter Notional Yen swap principal Yen notional principal = Swap bank UK subsidiary Notional GBP swap principal GBP notional principal = 3. 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. Relevant information, that you will require are provided below: Exchange rates: $/JPY $/Won $/CAD $/GPD $/AUS $/ZAR Current borrowing interest rates on loans: USA Japan South Korea Canada UK Australia South Africa Spot Bid Ask 0.0094 0.0095 0.0006 0.0008 0.7614 0.7616 1.3034 1.3038 0.7225 0.7226 0.0606 0.0607 Fixed Libor 0.640% 0.130% 0.525% 0.015% 1.164% 0.654% 0.666% 0.156% 0.577% 0.067% 0.612% 0.102% 5.045% 4.535% BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE S Yen Won CAD$ GPD AUS ZAR Years Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% 1 0.630 0.650 0.515 0.535 1.154 1.174 0.656 0.676 0.567 0.587 0.602 | 0.622 | 5.035 5.055 2 0.640 0.660 0.525 0.545 1.164 1.184 0.666 0.686 0.577 0.597 0.612 0.632 5.045 5.065 3 0.650 0.670 0.535 0.555 1.174 1.194 0.676 0.696 0.587 0.607 0.622 0.642 5.055 5.075 4 0.660 0.680 0.545 0.565 1.184 1.204 0.686 0.706 0.597 0.617 0.632 0.652 5.065 5.085 5 0.670 0.690 0.555 0.575 1.194 1.214 0.696 0.716 0.607 0.627 0.642 0.662 5.075 5.095 6 0.680 0.700 0.565 0.585 1.204 1.224 0.706 0.726 0.617 0.637 0.652 0.672 5.085 5.105 7 0.690 0.710 0.575 0.595 1.214 1.234 0.716 0.736 0.627 0.647 0.662 0.682 5.095 5.115 8 0.700 0.720 0.585 0.605 1.224 1.244 0.726 0.746 0.637 | 0.657 0.672 0.692 5.105 5.125 9 0.710 0.730 0.595 0.615 1.234 1.254 0.736 0.756 0.647 0.667 0.682 0.702 5.115 5.135 10 0.720 0.740 0.605 0.625 1.244 1.264 0.746 0.766 0.657 0.677 0.692 0.712 5.125 5.145 Other summarised information: United Kingdom subsidiary profits generated quarterly: Import cost of equipment/machinery for the manufacturing of electronic components in the U.S.A: 500,000 63,000,000 Period of time that the components can be paid (in years) 3 Number of payments per year Amount of each payment: 4 5,250,000 Paragraph > Styles Question 3: (16 marks) a. 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. Workings: Calculation of the notional principal of the hedge in Japanese yen: Payments to be conducted by HighTech subsidiary in the U.K. How often? Monthly = 12/ Quarterly = 4/Semi-annual = 2 Swap bank Yen bid rate Therefore, notional Yen principal calculated with information above Provide your answers in the cells below Marks 0.5 mark 0.5 mark 0.5 mark 0.5 mark Calculation of the notional principal of the hedge in British pounds: Spot exchange rate $/Yen ask rate Spot exchange rate $/GBP bid rate Therefore, British pound notional principal calculated with information above. Swap bank 3 year GBP ask rate U.K. subsidiary pays quarterly: Provide your answers in the cells below Marks 0.5 mark 0.5 mark 0.5 mark 0.5 mark 0.5 mark Question 3 continued: Complete the diagram below to show the swap transaction graphically by inserting the correct interest rate or currency values below: (6 marks) Japanese exporter Notional Yen swap principal Yen notional principal = Swap bank UK subsidiary Notional GBP swap principal GBP notional principal =