The CEO considers the investment in South Africa by entering into an agreement with Electo Co....

  

 

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The CEO considers the investment in South Africa by entering into an agreement with Electo Co. to expand the existing plant by investing ZAR120, 000,000. The CEO believes MidTech should borrow the funds in US$ at a fixed rate from a bank in the U.S.A. and convert it into ZAR for investment. For this purpose a 5 year (60 month) currency swap transaction will be required. He wants to be provided with a 5 year currency swap proposal. 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 $/GBP $/AU$ $/ZAR Bid 0.0094 0.0006 0.7614 1.3034 0.7225 0.0606 Spot Ask 0.0095 0.0008 0.7616 1.3038 0.7226 0.0607 Current borrowing interest rates on loans: USA Japan South Korea Canada UK Australia South Africa BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE Yen Won CAD$ Fixed 0.640% 0.525% 1.164% 0.666% 0.577% 0.612% 5.045% GBP Libor 0.130% 0.015% Other summarised information: United Kingdom subsidiary profits generated quarterly: Estimated 30% share profit in South African plant per month: Capital cost of new electric tool plant in South Africa: Capital cost of expanding existing plant in South Africa to electronic component manufacturing and electric tool manufacturing: 0.654% 0.156% 0.067% 0.102% 4.535% AU$ Years Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% 1 0.630 0.650 0.676 0.567 0.587 0.602 0.622 5.035 5.055 2 0.640 0.660 0.515 0.525 0.535 3 0.650 0.670 0.535 1.154 1.174 0.656 0.545 1.164 1.184 0.666 0.555 1.174 1.194 0.676 1.204 0.686 1.214 0.696 0.632 5.045 5.065 0.642 5.055 5.075 0.652 5.065 5.085 4 0.660 0.680 0.545 0.565 1.184 5 0.670 0.690 0.555 0.575 0.686 0.577 0.597 0.612 0.696 0.587 0.607 0.622 0.706 0.597 0.617 0.632 1.194 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 0.595 1.214 1.234 0.716 0.736 0.627 0.647 0.662 0.682 5.095 5.115 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 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 0.720 0.740 0.605 0.625 1.244 1.264 0.746 0.766 7 0.690 0.710 0.575 8 9 10 0.657 0.677 0.692 0.712 5.125 5.145 ZAR 500,000 R2,000,000 R150,000,000 R120,000,000 Required Workings: ZAR to be invested: Spot exchange rate to purchase ZAR for investment: Borrowing rate in U.S.A. to be used: Value in US$ to be borrowed: Swap transaction: MidTech pays swap bank MidTech pays swap bank MidTech receives from swap bank MidTech receives from swap bank US Bank In which currency is the swap payment? e.g. in US$ or ZAR MidTech Show the figures that should be applied in this column FOREX Market State whether the payment is Fixed or Libor Complete the diagram below to show the swap transaction graphically by inserting the correct interest rate or currency values in all the arrows below: 8 marks (1 mark for each correct insertion in arrows) Swap Bank State the percentage (%) of the payment Marks 1 mark 1 mark 1 mark 1 mark LTL Marks 1 mark 1 mark 1 mark 1 mark The CEO considers the investment in South Africa by entering into an agreement with Electo Co. to expand the existing plant by investing ZAR120, 000,000. The CEO believes MidTech should borrow the funds in US$ at a fixed rate from a bank in the U.S.A. and convert it into ZAR for investment. For this purpose a 5 year (60 month) currency swap transaction will be required. He wants to be provided with a 5 year currency swap proposal. 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 $/GBP $/AU$ $/ZAR Bid 0.0094 0.0006 0.7614 1.3034 0.7225 0.0606 Spot Ask 0.0095 0.0008 0.7616 1.3038 0.7226 0.0607 Current borrowing interest rates on loans: USA Japan South Korea Canada UK Australia South Africa BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE Yen Won CAD$ Fixed 0.640% 0.525% 1.164% 0.666% 0.577% 0.612% 5.045% GBP Libor 0.130% 0.015% Other summarised information: United Kingdom subsidiary profits generated quarterly: Estimated 30% share profit in South African plant per month: Capital cost of new electric tool plant in South Africa: Capital cost of expanding existing plant in South Africa to electronic component manufacturing and electric tool manufacturing: 0.654% 0.156% 0.067% 0.102% 4.535% AU$ Years Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% 1 0.630 0.650 0.676 0.567 0.587 0.602 0.622 5.035 5.055 2 0.640 0.660 0.515 0.525 0.535 3 0.650 0.670 0.535 1.154 1.174 0.656 0.545 1.164 1.184 0.666 0.555 1.174 1.194 0.676 1.204 0.686 1.214 0.696 0.632 5.045 5.065 0.642 5.055 5.075 0.652 5.065 5.085 4 0.660 0.680 0.545 0.565 1.184 5 0.670 0.690 0.555 0.575 0.686 0.577 0.597 0.612 0.696 0.587 0.607 0.622 0.706 0.597 0.617 0.632 1.194 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 0.595 1.214 1.234 0.716 0.736 0.627 0.647 0.662 0.682 5.095 5.115 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 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 0.720 0.740 0.605 0.625 1.244 1.264 0.746 0.766 7 0.690 0.710 0.575 8 9 10 0.657 0.677 0.692 0.712 5.125 5.145 ZAR 500,000 R2,000,000 R150,000,000 R120,000,000 Required Workings: ZAR to be invested: Spot exchange rate to purchase ZAR for investment: Borrowing rate in U.S.A. to be used: Value in US$ to be borrowed: Swap transaction: MidTech pays swap bank MidTech pays swap bank MidTech receives from swap bank MidTech receives from swap bank US Bank In which currency is the swap payment? e.g. in US$ or ZAR MidTech Show the figures that should be applied in this column FOREX Market State whether the payment is Fixed or Libor Complete the diagram below to show the swap transaction graphically by inserting the correct interest rate or currency values in all the arrows below: 8 marks (1 mark for each correct insertion in arrows) Swap Bank State the percentage (%) of the payment Marks 1 mark 1 mark 1 mark 1 mark LTL Marks 1 mark 1 mark 1 mark 1 mark

Answer rating: 100% (QA)

Here is a 5year currency swap proposal for the MidTech CEOs investment in South Africa MidTech shoul... View the full answer