JUULIINITIL . 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 HighTech 3 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 S/Won 0.0006 0.0008 $/CAD 0.7614 0.7616 S/GPD 1.3034 1.3038 S/AUS 0.7225 0.7226 $/ZAR 0.0606 0.0607 Current borrowing interest rates on loans: USA Japan South Korea Canada Fixed 0.640% 0.525% 1.164% 0.666% 0.577% 0.612% 5.045% Libor 0.130% 0.015% 0.654% 0.156% 0.067% 0.102% 4.535% UK Australia South Africa Page 2 of 4 D Focus + 80% W (1) ENG 12:48 28/05/2021 BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE S Yen Won CADS GPD AUS ZAR Years Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% 10.6300.650 0.515 0.535 1.154 1.174 0.656 0.676 0.567 0.587 0.602 0.622 5.035 5.055 20.640 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 30.650 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 40.660 0.680 0.545 0.565 1.184 1.204 0.686 0.706 0.597 0.617 0.632 0.6525.065 5.085 50.670 0.690 0.555 0.575 1.194 1.214 0.696 0.716 0.607 0.627 0.642 0.6625.075 5.095 60.680 0.700 0.565 0.585 1.204 1.224 0.706 0.726 0.617 0.637 0.652 0.672 5.0855.105 70.690 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 90.710 0.730 0.595 0.615 1.234 | 1.254 0.736 0.756 0.647 0.667 0.682 0.702 5.115 5.135 100.720 0.740 0.605 0.625 1.244 1.264 0.746 0.766 0.657 0.677 0.692 0.712 5.125 5.145 500,000 63,000,000 Other summarised information: United Kingdom subsidiary profits generated quarterly: Import cost of equipment/machinery for the manufacturing of electronic components in the U.S.A: Period of time that the components can be paid in years) Number of payments per year Amount of each payment: 1187 words 3 4 5,250,000 Page 1 of 4 E Type here to search Question 3 continued Complete the diagram below to show the swap transaction graphically by inserting the correct interest rate or currency values below: (6 marks) Japanese exporter Swap bank UK subsidiary Notional Yen Swap principal principal Notional GBP swap Yen notional principal GBP notional principal = b. Explain to the CEO what forfaiting is, why it is possible that forfaiting of the transaction can occur and the implication that it will have on the swap transaction. (4 marks) Provide your answers in space provided below: Question Your answer What is forfaiting? (Give an explanation). (3 marks) Why can forfaiting occur? (1 mark) Implication on the swap transaction (State whether it impacts the swap or not and the reason for it). (1 mark) Question 4: (14 marks) The banks of Australian and Canadian companies that purchase electronic tools from HighTech provides letters of credit and are required to conduct payment within 180 days after the goods have been shipped to them. Therefore, the banks issue bankers acceptances to HighTech's bank. There are Page 5 of 7 JUULIINITIL . 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 HighTech 3 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 S/Won 0.0006 0.0008 $/CAD 0.7614 0.7616 S/GPD 1.3034 1.3038 S/AUS 0.7225 0.7226 $/ZAR 0.0606 0.0607 Current borrowing interest rates on loans: USA Japan South Korea Canada Fixed 0.640% 0.525% 1.164% 0.666% 0.577% 0.612% 5.045% Libor 0.130% 0.015% 0.654% 0.156% 0.067% 0.102% 4.535% UK Australia South Africa Page 2 of 4 D Focus + 80% W (1) ENG 12:48 28/05/2021 BANK CURRENCY SWAP INTEREST RATE QUOTES AGAINST U.S. LIBOR RATE S Yen Won CADS GPD AUS ZAR Years Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% Bid% Ask% 10.6300.650 0.515 0.535 1.154 1.174 0.656 0.676 0.567 0.587 0.602 0.622 5.035 5.055 20.640 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 30.650 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 40.660 0.680 0.545 0.565 1.184 1.204 0.686 0.706 0.597 0.617 0.632 0.6525.065 5.085 50.670 0.690 0.555 0.575 1.194 1.214 0.696 0.716 0.607 0.627 0.642 0.6625.075 5.095 60.680 0.700 0.565 0.585 1.204 1.224 0.706 0.726 0.617 0.637 0.652 0.672 5.0855.105 70.690 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 90.710 0.730 0.595 0.615 1.234 | 1.254 0.736 0.756 0.647 0.667 0.682 0.702 5.115 5.135 100.720 0.740 0.605 0.625 1.244 1.264 0.746 0.766 0.657 0.677 0.692 0.712 5.125 5.145 500,000 63,000,000 Other summarised information: United Kingdom subsidiary profits generated quarterly: Import cost of equipment/machinery for the manufacturing of electronic components in the U.S.A: Period of time that the components can be paid in years) Number of payments per year Amount of each payment: 1187 words 3 4 5,250,000 Page 1 of 4 E Type here to search Question 3 continued Complete the diagram below to show the swap transaction graphically by inserting the correct interest rate or currency values below: (6 marks) Japanese exporter Swap bank UK subsidiary Notional Yen Swap principal principal Notional GBP swap Yen notional principal GBP notional principal = b. Explain to the CEO what forfaiting is, why it is possible that forfaiting of the transaction can occur and the implication that it will have on the swap transaction. (4 marks) Provide your answers in space provided below: Question Your answer What is forfaiting? (Give an explanation). (3 marks) Why can forfaiting occur? (1 mark) Implication on the swap transaction (State whether it impacts the swap or not and the reason for it). (1 mark) Question 4: (14 marks) The banks of Australian and Canadian companies that purchase electronic tools from HighTech provides letters of credit and are required to conduct payment within 180 days after the goods have been shipped to them. Therefore, the banks issue bankers acceptances to HighTech's bank. There are Page 5 of 7