HighTech is amultinational U.S.A. company that performs diverse activities. It manufactures electronic tools like hand-held digital electronic veniers, digital multimeters, voltage testers etc.

To conduct this manufacturing they import certain electronic components from countries like Japan and South Korea.

The market for the manufactured tools are the U.S.A, Australia, Canada and United Kingdom (U.K). However, the majority of sales is in the U.K. Therefore, the company has already put up a subsidiary in the U.K. It resells and distribute the products to different businesses. The quarterly net profit after tax generated by the subsidiary is 500,000. The exports to Canada and Australia are to other independent distributing companies that buys the tools at wholesale prices from HighTech.

HighTech is also considering the construction of an electronic component manufacturing plant in the U.S.A. to eliminate the risks and costs associated with the current importing of electronic components from countries like Japan and South Korea.

HighTech already has sufficient manufacturing space available and only has to import manufacturing equipment of 63,000,000 Yen from Japan. The installation of the machinery will be conducted by local U.S.A. companies and will cost $1000,000.

3. The profit generated by the subsidiary in the U.K. is considered as a good source of money to be used to pay for the import of manufacturing equipment from Japan for the electronic component plant in the U.S.A. The CEO has already entered into negotiations with the Japan supplier of the equipment.The supplier is willing to provide HighTech3 years to pay for the equipment that will be shipped to HighTech, but the payments must be conducted with quarterly instalments of 5,250,000 Yen by the U.K. subsidiary. This is why the CEO wants you to construct a currency swap arrangement where the profits of the U.K. subsidiary can be used to pay for the equipment. You have to apply the swap bank quotes to conduct this three year swap and also depict the swap graphically for the CEO to see how the swap will work. Relevant information, that you will require are provided below:

Exchange rates:

Spot

Bid

Ask

$/JPY

0.0094

0.0095

$/Won

0.0006

0.0008

$/CAD

0.7614

0.7616

$/GPD

1.3034

1.3038

$/AU$

0.7225

0.7226

$/ZAR

0.0606

0.0607

Current borrowing interest rates on loans:

Fixed

Libor

USA

0.640%

0.130%

Japan

0.525%

0.015%

South Korea

1.164%

0.654%

Canada

0.666%

0.156%

UK

0.577%

0.067%

Australia

0.612%

0.102%

South Africa

5.045%

4.535%

BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE

$

Yen

Won

CAD$

GPD

AU$

ZAR

Years

Bid%

Ask%

Bid%

Ask%

Bid%

Ask%

Bid%

Ask%

Bid%

Ask%

Bid%

Ask%

Bid%

Ask%

1

0.630

0.650

0.515

0.535

1.154

1.174

0.656

0.676

0.567

0.587

0.602

0.622

5.035

5.055

2

0.640

0.660

0.525

0.545

1.164

1.184

0.666

0.686

0.577

0.597

0.612

0.632

5.045

5.065

3

0.650

0.670

0.535

0.555

1.174

1.194

0.676

0.696

0.587

0.607

0.622

0.642

5.055

5.075

4

0.660

0.680

0.545

0.565

1.184

1.204

0.686

0.706

0.597

0.617

0.632

0.652

5.065

5.085

5

0.670

0.690

0.555

0.575

1.194

1.214

0.696

0.716

0.607

0.627

0.642

0.662

5.075

5.095

6

0.680

0.700

0.565

0.585

1.204

1.224

0.706

0.726

0.617

0.637

0.652

0.672

5.085

5.105

7

0.690

0.710

0.575

0.595

1.214

1.234

0.716

0.736

0.627

0.647

0.662

0.682

5.095

5.115

8

0.700

0.720

0.585

0.605

1.224

1.244

0.726

0.746

0.637

0.657

0.672

0.692

5.105

5.125

9

0.710

0.730

0.595

0.615

1.234

1.254

0.736

0.756

0.647

0.667

0.682

0.702

5.115

5.135

10

0.720

0.740

0.605

0.625

1.244

1.264

0.746

0.766

0.657

0.677

0.692

0.712

5.125

5.145

Other summarised information:

United Kingdomsubsidiary profits generated quarterly:

500,000

Import cost of equipment/machinery for the manufacturing of electronic components in the U.S.A:

63,000,000

Period of time that the components can be paid (in years)

3

Number of payments per year

4

Amount of each payment:

5,250,000