Case 1 Circus Swap A circus swap is a combination of an interest rate swap and a currency swap The swap involves three counter parties Ford Motor Company (US), Quantas Airlines (Australia) and Fosters Brewerys parent group, AB Inbev (Australia) Suppose that Ford, Quantas and Fosters have the following borrowing terms in the US and Australia USD Fixed AUD Fixed Floating Ford 5 0 6 5 LIBOR 10 bps Fosters 7 0 7 25 LIBOR Quantas 6 75 7 15 LIBOR Part 1 Currency Swap Ford needs AUD for a capital project that they will undertake in Sydney Fosters plans on adding to an existing brewery facility in the US and so they desire USD Since both involve capital projects they both desire fixed rate funding For the currency swap, Fosters and Ford borrow fixed in their respective capital markets from outside lenders What terms would each borrow under (Ford USD, Fosters AUD) In the swap, Fosters agrees to pay Ford 5 75 fixed for USD and Ford agrees to pay Fosters 6 75 fixed for AUD Draw a diagram to show the direction of payment and the cash flows for each party Use the supplied Part 1 template for your diagram What are the net borrowing costs for Ford and Fosters after the swap and how much did each party save Analyze the inflows and outflows for each party to answer this part Part 2 Interest Rate Swap Ford decides after this is done that they really need to alter the loan to a floating rate loan They begin with the terms of the swap that they had with Fosters above They then agree to an AUD AUD fixed for floating swap with Quantas, who wants fixed rate money in the same term as For For the fixed floating swap, Quantas borrows in their respective capital market from their outside lender at LIBOR Ford agrees to pay Quantas LIBOR and Quantas agrees to pay Ford 6 25 fixed for AUD Draw a diagram and show the direction of payment and cash flows for each party Use the supplied part 2 template for your diagram What are the net borrowing costs and savings for each party after this leg of the swap Analyze the inflows and outflows for each party to answer this Part 1 Part 2

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Case 1 Circus Swap A circus swap is a combination of an interest rate swap and a currency swap. The swap involves three counter parties:

Case 1

Circus Swap

A circus swap is a combination of an interest rate swap and a currency swap. The swap involves three counter parties: Ford Motor Company (US), Quantas Airlines (Australia) and Fosters Brewerys parent group, AB Inbev (Australia).

Suppose that Ford, Quantas and Fosters have the following borrowing terms in the US and Australia:

USD Fixed AUD Fixed Floating

Ford 5.0% 6.5% LIBOR+10 bps

Fosters 7.0% 7.25% LIBOR

Quantas 6.75% 7.15% LIBOR

Part 1: Currency Swap

Ford needs AUD for a capital project that they will undertake in Sydney. Fosters plans on adding to an existing brewery facility in the US and so they desire USD. Since both involve capital projects they both desire fixed rate funding.

For the currency swap, Fosters and Ford borrow fixed in their respective capital markets from outside lenders. What terms would each borrow under (Ford USD, Fosters AUD)?
In the swap, Fosters agrees to pay Ford 5.75 fixed for USD and Ford agrees to pay Fosters 6.75 fixed for AUD. Draw a diagram to show the direction of payment and the cash flows for each party. Use the supplied Part 1 template for your diagram.
What are the net borrowing costs for Ford and Fosters after the swap and how much did each party save? Analyze the inflows and outflows for each party to answer this part.

Part 2: Interest Rate Swap

Ford decides after this is done that they really need to alter the loan to a floating rate loan. They begin with the terms of the swap that they had with Fosters above. They then agree to an AUD/AUD fixed for floating swap with Quantas, who wants fixed rate money in the same term as For
For the fixed/floating swap, Quantas borrows in their respective capital market from their outside lender at LIBOR. Ford agrees to pay Quantas LIBOR and Quantas agrees to pay Ford 6.25% fixed for AUD. Draw a diagram and show the direction of payment and cash flows for each party. Use the supplied part 2 template for your diagram.
What are the net borrowing costs and savings for each party after this leg of the swap? Analyze the inflows and outflows for each party to answer this.

Part 1: