Background:

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 the 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.

Wools CEO wondering whether 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:

if the CEO wants to borrow in Japanese Yen, what are the possible risks?

how can Wools use a currency swap to manage this risk?

*here I present you the pictures of;

1) the swap arrangement of Wools and Bright Corp.

2) LIBOR interest rate forecasts

3) Historical exchange rate for the USD/JPY exchange rate

4) actual BOP and forecasts BOP (2004-2006)

5) Wools investment and borrowing rates

Please answer this question completely and thoroughly and focus 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

Thank you

*Hi I'm not sure what kind of information you need more, but I have presented all the information needed in the pictures. I hope it helps, and the main question you need to answer is the word under question section that I have bolded. I will get more information again if I could. Thanks.

Fixed Rate Floating Rate Libor + 0.5% Bright Corp. 5.5% Wools Libor + 1.2% 6.5% Exhibit 2: LIBOR Interest Rate Forecasts Currency Euro Dollar British Pound Japanese Yen Swiss Franc 2004 Forecast 2.5% 4.5% 5% 0.2% 0.7% 2005 - Forecast 2.7% 5% 5.5% 0.5% 1% 2006 - Forecast 3.3% 5.7% 5.8% 0.7% 1.2% Exhibit 3: Historical Exchange Rate for the USD/JPY Exchange Rate YEAR USD/JPY Exchange Rate Jul-03 0.008298 Aug-03 0.008555 Sep-03 0.008970 Oct-03 0.009101 Nov-03 0.009124 Dec-03 0.009319 Source: Extracted by authors from Global Financial Database Exhibit 4: Balance of Payments Exhibit 4A: 2001 - 2003 (Actuals US-Dollar converted) Country 2002 2003 Account Type Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items 2001 86,219.92 2,868.84 3,673.15 87,024.23 40,487.08 Japan 108,861.30 3,321.24 360.11 105,900.16 46,133.63 139,380.52 - 3,997.62 - 16,994.32 118,388.58 187,153.28 United States Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items -389,693.00 13,200.00 - 25,544.00 402,037.00 4,926.73 -450,802.00 141.00 - 51,730.00 -502,673.00 3,692.39 -518,747.00 1,820.00 - 20,018.00 -540,585.00 1,529.35 Euro area Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items - 24,223.90 5,114.13 44,346.88 25,237.11 - 16,455.45 44,579.56 10,333.09 - 36,945.85 17,966.80 2,977.72 24,891.69 14,349.32 - 23,234.54 16,006.47 - 32,818.07 Exhibit 4B: 2004 2006 (Forecasts US-Dollar converted) Country 2004 2005 2006 Account Type Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items Japan 181,993.75 4,787.08 - 28,927.82 148,278.85 160,853.82 170,122.75 - 4,877.58 - 16,289.22 148,955.94 22,325.37 174,672.77 4,756.58 - 31,991.52 137,924.68 31,981.45 United States Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items -631,590.00 3,047.00 86,317.00 -542,226.00 - 2,802.97 -745,246.00 13,115.00 18,064.00 -714,067.00 14,084.61 -805,962.00 1,788.00 - 17,827.00 -825,577.00 2,390.32 Euro area Current account balance 81,294.16 Net capital account 20,483.56 Net errors and omissions 6,325.08 Net financial account 108,102.80 Reserves and related items 15,552.92 Source: Data from the World Development Indicators 19,188.04 14,238.84 15,768.30 49,195.18 22,901.08 356.37 11,738.58 19,093.57 30,475.78 2,565.64 Currency Dollar Japanese Yen Investment and Borrowing Rates Borrowing LIBOR + 120 basis points LIBOR + 150 basis points Investment LIBOR +90 basis points LIBOR + 120 basis points Fixed Rate Floating Rate Libor + 0.5% Bright Corp. 5.5% Wools Libor + 1.2% 6.5% Exhibit 2: LIBOR Interest Rate Forecasts Currency Euro Dollar British Pound Japanese Yen Swiss Franc 2004 Forecast 2.5% 4.5% 5% 0.2% 0.7% 2005 - Forecast 2.7% 5% 5.5% 0.5% 1% 2006 - Forecast 3.3% 5.7% 5.8% 0.7% 1.2% Exhibit 3: Historical Exchange Rate for the USD/JPY Exchange Rate YEAR USD/JPY Exchange Rate Jul-03 0.008298 Aug-03 0.008555 Sep-03 0.008970 Oct-03 0.009101 Nov-03 0.009124 Dec-03 0.009319 Source: Extracted by authors from Global Financial Database Exhibit 4: Balance of Payments Exhibit 4A: 2001 - 2003 (Actuals US-Dollar converted) Country 2002 2003 Account Type Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items 2001 86,219.92 2,868.84 3,673.15 87,024.23 40,487.08 Japan 108,861.30 3,321.24 360.11 105,900.16 46,133.63 139,380.52 - 3,997.62 - 16,994.32 118,388.58 187,153.28 United States Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items -389,693.00 13,200.00 - 25,544.00 402,037.00 4,926.73 -450,802.00 141.00 - 51,730.00 -502,673.00 3,692.39 -518,747.00 1,820.00 - 20,018.00 -540,585.00 1,529.35 Euro area Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items - 24,223.90 5,114.13 44,346.88 25,237.11 - 16,455.45 44,579.56 10,333.09 - 36,945.85 17,966.80 2,977.72 24,891.69 14,349.32 - 23,234.54 16,006.47 - 32,818.07 Exhibit 4B: 2004 2006 (Forecasts US-Dollar converted) Country 2004 2005 2006 Account Type Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items Japan 181,993.75 4,787.08 - 28,927.82 148,278.85 160,853.82 170,122.75 - 4,877.58 - 16,289.22 148,955.94 22,325.37 174,672.77 4,756.58 - 31,991.52 137,924.68 31,981.45 United States Current account balance Net capital account Net errors and omissions Net financial account Reserves and related items -631,590.00 3,047.00 86,317.00 -542,226.00 - 2,802.97 -745,246.00 13,115.00 18,064.00 -714,067.00 14,084.61 -805,962.00 1,788.00 - 17,827.00 -825,577.00 2,390.32 Euro area Current account balance 81,294.16 Net capital account 20,483.56 Net errors and omissions 6,325.08 Net financial account 108,102.80 Reserves and related items 15,552.92 Source: Data from the World Development Indicators 19,188.04 14,238.84 15,768.30 49,195.18 22,901.08 356.37 11,738.58 19,093.57 30,475.78 2,565.64 Currency Dollar Japanese Yen Investment and Borrowing Rates Borrowing LIBOR + 120 basis points LIBOR + 150 basis points Investment LIBOR +90 basis points LIBOR + 120 basis points