Wools is a company that has declined to 30% of its profit, its credit rating received a
Question:
Wools is a company that has declined to 30% of its profit, its credit rating received a downgrade from AA to BBB and decided against issuing bonds.
The CEO decided to borrow funds. Bank as their lender wanted to give them floating rate loans due to their credit rating. Wools preferred fixed-rate loans for certainty While another company, Bright Corp. who had an A credit rating preferred the floating rate.
they need to borrow $500m for the next 3 years, begin from January of 2004-2006
current libor is 4.5% and they forecast that interest rate will increase in the future
then they enter a swap where Bright pays a floating rate of libor and receives a fixed of 5.2%
Wools pays a fixed of 5.2% and receives floating to help it pay for the floating-rate loan.
Issue:
1.) Wools CEO wondering whether to borrow in the Euro
-given that it has the lowest interest rate in the country in which their company operated.
2.) Or to borrow in Yen because the rate of Yen was lower than the Euro.
-But Wools will have higher exposure to exchange rate risk if borrowing in the Yen as they didn't have operations(revenues) in Japan.
-Yen had appreciated for the last 6 months.
Question:
Assume that Wools borrows floating at the market rate whilst Bright Corp borrows fixed at the market rate. Further, assume that Bright Corp. and Wools enter into a swap where Bright pays a floating rate of LIBOR and receives a fixed rate of 5.2%. Show the distribution of gains between Bright Corp. and Wools. Who benefits the most from this swap arrangement?
Please answer this question completely and thoroughly.
please elaborate on :
-Interest rate and factors that might affect them
-Exchange rate and factors that might affect them
-BOP position, were important to understand whether a country's currency would appreciate or depreciate
*here I present you pictures of;
1) the swap arrangement between Wools and Bright Corp.
2) LiBOR interest rate forecasts
3) BOP of the US, Euro area, and Japan. 2001-2003 and 2004-2006(forecast for the loan)
4) Historical exchange rate USD/JPY
5) Wools investment and borrowing rates
Thank you
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