How the risk would be offset by a combination of a 15-year

Assignment Help Econometrics

Reference no: EM13223623

a) While market-based hedging instruments can be used to offset or counter uncertainties in interest rates and exchange rates as they impact the income statement, balance sheet hedges require a different approach. Assume you are the CFO of Toyota trying to offset the balance sheet risks associated with Toyota's $4.5 billion investment in Georgetown Kentucky. Please explain how this risk would be offset by a combination of a 15-year Euro Dollar Bond with equal repayments in the last five years and a floating rate 10 year syndicated Euro-Dollar bank loan combined with an interest rate swap. Assume a fifteen-year straight-line amortization of the new Georgetown facility.

b) Look at the JAL FX loss scenario in the Additional Text Readings where JAL lost as much or more in FX than the $800 million value of the planes it was purchasing. Then calculate JAL's cost if it had used a different type of hedge, borrowing US $ to buy US government bonds that it then cashed as each plane was purchased. Generally one can borrow up to 95% of the value of US government bonds with the borrowing cost normally about .25% or 25 basis points above the yield on the bonds. Assume that the yield on the bonds is 8% and that they borrow for the full 10 years noted in the case.

Reference no: EM13223623

Questions Cloud

What is 8month forward rate for one dollar in terms of won : Assuming the same interest rates, what isthe 8-month forward rate for one dollar in terms of won Is this an indirect or a directrate If the forward rate is an accurate predictor of exchange rates, in this case will thewon get stronger or weaker ag..

Explain model-based expert systems : Explain model-based expert systems and frame-based expert systems

What are norms : What are norms? What is cohesiveness? How are norms and cohesiveness related?

How are assertiveness and cooperativeness related to each : In the context of direct conflict management approaches, what are assertiveness and cooperativeness? How are assertiveness and cooperativeness related to each of the five basic direct conflict management approaches?

How the risk would be offset by a combination of a 15-year : While market-based hedging instruments can be used to offset or counter uncertainties in interest rates and exchange rates as they impact the income statement, balance sheet hedges require a different approach. Assume you are the CFO of Toyota try..

Convert euro back to dollars at the end of the three-years : Using cash flow analysis, determine in which currency Microsoft should invest. Be sure to show your complete calculations of the annual return and conversion of Euro back to dollars at the end of the three-year term. Assume that the annual interes..

What is the balance of the loan at the end of 2010 : (a) What would be the monthly payment (b) If the person accepted the terms of the loan on Oct. 1, 2008 (the first payment was due November 1, 2008), what is the balance of the loan at the end of 2010

What percentage change in the price of each good : b) Using a method similar to the consumer price index, compute the percentage change in the overall price level. c) If you were to learn that a bottle of Gatorade increased in size from 2009 to 2010, should that information affect your calculation..

Describe what is the hedonic method : Economists at BLS specialize in particular products, such as televisions, automobiles, kitchen appliances, and so on. One of their greatest challenges is to identify substitutes for products that are no longer available on the market.

User Account

All Pages