Cross-Currency Swaps, the Banc Zero case, and Mexico

Use the information on the previous page and what you know about the BancZero Case to answer the following questions. Assume that BancZero, Mexico City branch is structuring a deal for a Mexican indigenous company, Lazero Cerveza, who has only Mexican Peso cash flow. Lazero Cerveza has a $US loan in San Francisco.

1. When do the principal /notional amounts of the currency swap get exchanged, if ever; what about an interest rate swap when, if ever? What is the present value of the Mexican Peso Outflows in $US at time 0, meaning the outset of the swap? What must be true about the two present values at time zero? 2.5 marks

1. Describe the roles of Ricardo Elizondo, Susan MacLaughlin, and Fernando Manzanilla in the BancZero case where do they work - city? What is Operational Risk and how is it present in the case? Who is Eddie George in our story? Who would you want to have a drink with? Mixing a bit of fact with fiction here is all right. 2.5 marks

Look at the bottom half of the previous page below the thick black line

1. Calculate the present value of the remaining $US cash flows, as at the end of Year 3 (meaning years 4 to 7 inclusive) based on the information given in the spreadsheet. What is the total present value of the remaining Mexican Peso cash flows at the end of year 3? (meaning years 4 to 7 inclusive)? If the swap is terminated at the end of Year 3, who owes who how much in US dollars, show this mark-to-market calculation. 5 marks

1. How can the mark-to-market risk be mitigated? Who is most concerned about the risk calculated in the spreadsheet, why? What is an ISDA agreement and why do you need one for all derivatives trading dont leave home without it? - 5 marks