Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
The reason why, is because these kinds of companies are often exposed to large swings that could happen at any point in time (due to adverse changes in the economy or the markets). This will have a negative effect on earnings and it will become difficult from them to make accurate projections. When a company begins using hedging, this will provide more consistent earnings stability to their business model. This is point that they can provide more stable returns to shareholders.
However, not all firms should be hedging. In some cases, this activity could be considered to be speculation. As, the hedge may not provide any kind significant benefit to the business by: addressing a challenge that they are facing. Instead, it is executives using the company's funds to make risky trades. As their business, will see no benefit from: the position other than to receive a financial gain. When this happens, it is a sign that a firm should not be involved in these activities. This is due to the fact that it is: increasing their risks and not supporting the long-term viability of the company.
Question 5
Trident is a multinational corporation that has operations in several countries. Although Trident is based in the U.S. And its profits are reported in USD, its revenues are denominated in various currencies including the AUD. Recently, Trident took out a 3-year USD loan at a fixed interest rate of 3.5% per annum. Since Trident has AUD revenues, it has decided to enter in a three-year swap to receive USD and pay AUD. The...
The notional amount of the swap is USD 10 million with the USD/AUD exchange rate of 0.77.
(a) Calculate the USD loan interest payments
(b) Calculate the AUD principal and interest payments under the swap agreement
(c) Draw the following time lines with their respective values
TRIDENT
USD Loan payments
SWAP
Receive USD
SWAP
Pay AUD
(d) One year into the swap agreement, Trident's operations in Australia have become unprofitable and it has decided to withdraw from the Australian market. Consequently Trident has to unwind the swap as it no longer has the AUD revenue to service the AUD swap payments. At that time the two-year fixed rate on the USD loan is 3.2% per annum and the two-year fixed rate on the AUD loan is 5.5% per annum. The spot rate is USD/AUD 0.75.
(i) Calculate the present value of the remaining USD swap receipts.
(ii) Calculate the present value of the remaining AUD swap payments.
(iii) Calculate the present value of the swap. Hint: the present value of the swap is the difference between the present value of the payments and the present value of the cash flows received discounted at interest rates applicable to each currency.
(iv) For the swap to be discharged, identify who pays whom what?
Bibliography
Thomas, M, 2005, Hedging Instruments and Risks. McGraw Hill, New York.
Bibliography
Thomas, M, 2005, Hedging Instruments and Risks. McGraw Hill, New York.
International Financial Crises and the IMF Demand failures are a major economic problem, and one that cannot necessarily be addressed by cutting interest rates as once believed. Small economies, such as those known as the Asian "tigers" are not invulnerable to international speculation. They may, in fact, resist cutting their interest rates -- raising them instead in an effort to keep their currencies from collapse. Failed economies financed poor investments with
International Monetary System In world trade, varied national currencies are swapped for each other by means of rules and procedures set by a system called the international monetary system. To delineate a general standard of value for the world's currencies, such a system is believed to be necessary. The global monetary structure has always adhered to the organizational framework of the international discipline. In each stage of the financial capitalism there exists
In the case of United States, Article 9 of the Uniform Commercial Code provides for practically all types of security agreements for owned property that are both for own use as also for commercial purposes. This type of agreements includes fixtures which mean personal property that is attached to the property, and the ready example can be a water heater. This does not include other liens taken on the property
Liquidity shocks on the international arena can have a strong negative impact on less developed countries whose access to funding sources is already reduced. The clearing risk is a specific risk, which combines credit risk, in the sense that it results from a counterparty's inability to meet its liabilities, market risk in the sense that it is caused by market shifts (general and specific market risk) between the time a
Another reason why corporations choose to hold cash balances in a centralized repository is that the variety of accounts can be better managed as a mutual fund more complex investment structure than would be the case if the subsidiary alone managed the funds. A greater quality of information is available for example in the leading financial centers globally that would otherwise not be the case in more remote regions, making
International financial manager at Apple Inc. is the Senior Financial Analyst who has been serving in this department since October 2005. This individual works in close partnership with the Operations, IS&T and Merchandising departments in launching support, prices and planning changes of the various products of Apple Inc. Currently, Greg Gingo is the Senior Financial Analyst at Apple Inc. And has created and executed system expected commissions through the use