On November 2, 2017, Scannell, LTD., issued a $200 million, five-year maturity CDs (liability) denominated in...

   

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On November 2, 2017, Scannell, LTD., issued a $200 million, five-year maturity CDs (liability) denominated in Dollars at an interest rate of 2.25 percent. The CDs pay interest annually and the principal value of $200 million at maturity. Also on November 2, 2017, Scannell invested $150 million in a Rouble (P)-denominated ten-year maturity loan with an annual interest rate of 11 percent and $50 million was invested in a ten-year maturity U.S. Treasury note with an interest rate of 2.34 percent. The Rouble denominated loan pays interest annually with the principal paid at maturity (remember this loan contract is denominated in Rouble (P)). The ten-year U.S. Treasury note pays interest semiannually. The exchange rate on November 2, 2017 was P59.0141/$. The exchange rate on November 2, 2018 was P66.0468/$. Market interest rates in the U.S. for four-year maturity CDs on November 2, 2018 are 2.50 percent, the current market yield to maturity for an 9-year maturity U.S Treasuries is 3.20 percent, and the interest rate on an 9-year maturity Russian loan increased from 11 percent on the loan when originated on November 2, 2017 to a market rate of 13 percent on November 2, 2018. Thus, values of both assets and liabilities decline since interest rates increased in both Russia and the U.S. Note that the values of each of the balance sheet assets and liabilities change because of changes in market interest rates, changing time to maturities and changes in exchange rates. Fill in the table below for the balance sheets in Dollars and Rouble (P). Since Scannell, LTD was exposed to both interest rate risk and exchange rate risk, what were the gains or losses resulting from interest rate changes, maturity changes and the gains or losses due to exchange rate changes? Exchange rates may be found at: https://www.xe.com/currencycharts/?from-USD&to-RUB&view=IM U.S Treasury rates may be found at: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx Solution matrix for problem (Market Values) November 2, 2017 Date: P59.0141/$ Balance Sheet Dollar Values (in millions) Rouble Dollar CD Loan $150 U.S T-bill $50 $200 $200 $200 Balance Sheet Rouble Values (in millions) Rouble Loan P U.S.T-bill P P Dollar P CD AL P November 2, 2018 Date: P66.0268/$ Balance Sheet Dollar Values (in millions) Rouble Dollar Loan $ CD S US Trea$ Total $ Gain or loss in $ Balance Sheet Rouble Values (in millions) Rouble Loan P USTreaP P Gain or loss in P Dollar CD P P13.081.17 Russian Loan Price in Roubles on 11/2/18 with 9 years to maturity, yielding 13% N VB=INT V₁ = INT[ 1-(+₂) ^ ] + Ma rd Ved = [] + M ( + 72 ) N VTB = or $ VB = 973.73 VB 4,996.85 +2,946.73= P7.943.58 or P7,943.58/P66.0268/$=$ Scannell LTD CD in $ on 11/2/18 with 4 years to maturity. vield 2.50% 3 [1-(1 VCD = 4.50 [1-₁ =$ *P66.0268/$=P or $ U.S Treasury Bond in $ on 11/2/18 with 9 years to maturity, vielding 3.2% [1 (1+0.0160)-18 0.0160 -(1 + 0.13) 9 0.13 VTB = 0.5850 P66.0268/SP - (1+0.025) 0.025 +8,852.10(1.13)-⁹ = +200.00(1.025)-4 +50.00(1.0160)-18 On November 2, 2017, Scannell, LTD., issued a $200 million, five-year maturity CDs (liability) denominated in Dollars at an interest rate of 2.25 percent. The CDs pay interest annually and the principal value of $200 million at maturity. Also on November 2, 2017, Scannell invested $150 million in a Rouble (P)-denominated ten-year maturity loan with an annual interest rate of 11 percent and $50 million was invested in a ten-year maturity U.S. Treasury note with an interest rate of 2.34 percent. The Rouble denominated loan pays interest annually with the principal paid at maturity (remember this loan contract is denominated in Rouble (P)). The ten-year U.S. Treasury note pays interest semiannually. The exchange rate on November 2, 2017 was P59.0141/$. The exchange rate on November 2, 2018 was P66.0468/$. Market interest rates in the U.S. for four-year maturity CDs on November 2, 2018 are 2.50 percent, the current market yield to maturity for an 9-year maturity U.S Treasuries is 3.20 percent, and the interest rate on an 9-year maturity Russian loan increased from 11 percent on the loan when originated on November 2, 2017 to a market rate of 13 percent on November 2, 2018. Thus, values of both assets and liabilities decline since interest rates increased in both Russia and the U.S. Note that the values of each of the balance sheet assets and liabilities change because of changes in market interest rates, changing time to maturities and changes in exchange rates. Fill in the table below for the balance sheets in Dollars and Rouble (P). Since Scannell, LTD was exposed to both interest rate risk and exchange rate risk, what were the gains or losses resulting from interest rate changes, maturity changes and the gains or losses due to exchange rate changes? Exchange rates may be found at: https://www.xe.com/currencycharts/?from-USD&to-RUB&view=IM U.S Treasury rates may be found at: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx Solution matrix for problem (Market Values) November 2, 2017 Date: P59.0141/$ Balance Sheet Dollar Values (in millions) Rouble Dollar CD Loan $150 U.S T-bill $50 $200 $200 $200 Balance Sheet Rouble Values (in millions) Rouble Loan P U.S.T-bill P P Dollar P CD AL P November 2, 2018 Date: P66.0268/$ Balance Sheet Dollar Values (in millions) Rouble Dollar Loan $ CD S US Trea$ Total $ Gain or loss in $ Balance Sheet Rouble Values (in millions) Rouble Loan P USTreaP P Gain or loss in P Dollar CD P P13.081.17 Russian Loan Price in Roubles on 11/2/18 with 9 years to maturity, yielding 13% N VB=INT V₁ = INT[ 1-(+₂) ^ ] + Ma rd Ved = [] + M ( + 72 ) N VTB = or $ VB = 973.73 VB 4,996.85 +2,946.73= P7.943.58 or P7,943.58/P66.0268/$=$ Scannell LTD CD in $ on 11/2/18 with 4 years to maturity. vield 2.50% 3 [1-(1 VCD = 4.50 [1-₁ =$ *P66.0268/$=P or $ U.S Treasury Bond in $ on 11/2/18 with 9 years to maturity, vielding 3.2% [1 (1+0.0160)-18 0.0160 -(1 + 0.13) 9 0.13 VTB = 0.5850 P66.0268/SP - (1+0.025) 0.025 +8,852.10(1.13)-⁹ = +200.00(1.025)-4 +50.00(1.0160)-18

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ANSWER To calculate the gain or loss resulting from interest rate changes maturity changes and exchange rate changes we need to determine the market v... View the full answer