TNB has a 10-year, ¥50 million loan outstanding with a Japanese bank. The Yen loan has a 2.5% annual interest rate. The loan was taken 5 years ago and so has 5 more years to go. Daibochi, a Japanese plastics maker with operations in Malaysia has just negotiated a RM 5 million, 5-year loan with Maybank at 7.5% annual interest. Both companies are worried about the foreign exchange exposure. Design a currency swap that will enable both companies to manage exchange rate risk. (Assume debt servicing will be on 6-monthly basis, the spot Yen/Ringgit rate is 10 Yen/Ringgit).

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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TNB has a 10-year, ¥50 million loan outstanding with a Japanese bank. The Yen loan
has a 2.5% annual interest rate. The loan was taken 5 years ago and so has 5 more years
to go. Daibochi, a Japanese plastics maker with operations in Malaysia has just
negotiated a RM 5 million, 5-year loan with Maybank at 7.5% annual interest. Both
companies are worried about the foreign exchange exposure. Design a currency swap
that will enable both companies to manage exchange rate risk. (Assume debt servicing
will be on 6-monthly basis, the spot Yen/Ringgit rate is 10 Yen/Ringgit). 

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