Q1. 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. Workings: Calculation of the notional principal of the hedge in Japanese yen:

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%

Calculation of the notional principal of the hedge in British pounds:

	Provide your answers in the cells below	Marks
Spot exchange rate $/Yen ask rate		0.5 mark
Spot exchange rate $/GBP bid rate		0.5 mark
Therefore, British pound notional principal calculated with information above.		0.5 mark
Swap bank 3 year GBP ask rate		0.5 mark
U.K. subsidiary pays quarterly:		0.5 mark
GBP/Yen Exchange rate locked in for three years:		0.5 mark