Foundations of Multinational Financial Management Alan Shapiro John Wiley

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Foundations of Multinational Financial
Management Alan Shapiro John Wiley Sons

• Power Points by
• Joseph F. Greco, Ph.D.
• California State University, Fullerton

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Special Financing and Interest Rate Risk
Management Vehicles

• Chapter 13

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INTEREST RATE AND CURRENCYSWAPS

• I. INTEREST RATE AND CURRENCY
• SWAPS
• A. INTEREST RATE SWAPS
• 1. Definition
• an agreement between 2 parties to
• exchange US interest payments
• for a specific maturity on an agreed
  notional amount.

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THE CLASSIC SWAP

• a. Notional principal a reference amount
  used only to calculate interest expense but
  never repaid.
• b. Maturities less than 1 to over 15
  years

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THE CLASSIC SWAP

• 2. Types
• a. Coupon swap
• b. Basis swap
• 3. Usage
• to reduce risk potential and costs.

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THE CURRENCY SWAP

• B. Currency Swaps
• 1. Definition
• two parties exchange foreign-currency-
• denominated debt at periodic intervals.
• 2. Purpose similar to parallel loan

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THE CURRENCY SWAP

• 3. Differences of a Currency Swap
• a. Currency swap is not a loan
• b. No interest expense no balance sheet
  entry
• c. The right to offset any non- payment is
  more firmly establish

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THE CURRENCY SWAP

• 4. Similarities between Interest Rate and
• Currency Swaps
• a. Avoid exchange rate risk
• b. Exchange rate is only a reference to
• determine amounts exchanged
• 5. Economic Benefits of Swaps
• when arbitrage prohibited, they provide
• long-term financing.

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INTEREST RATE FORWARDS AND FUTURES

• Forward and futures contracts
• - three types used to manage interest rate risk
• A. Forward forwards
• B. Forward rate agreements
• C. Eurodollar futures

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INTEREST RATE FORWARDS AND FUTURES

• Forward forwards
• 1. a contract that fixes an interest
  rate today on a future loan or deposit.
• 2. Contract conditions
• - specific interest rate
• - principal amount of future loan
• - start and ending dates of future
• interest rate period

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INTEREST RATE FORWARDS AND FUTURES

• Forward rate agreements (FRAs)
• 1. cash-settled,
• 2. over-the-counter forward contract 3.
  company fixes an interest rate
• applied to a specified future
  interest period on a notional amount.

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INTEREST RATE FORWARDS AND FUTURES

• Eurodollar Futures
• 1. a cash-settled futures contract for
• a 3-month eurodollar deposit
• paying LIBOR
• 2. Contracts traded on
• a. Chicago Mercantile Exchange
• b. London International Financial Futures
  Exchange
• c. Singapore International Monetary
  Exchange