You are an analyst in the treasury department  of  the Maritime Bank (MB). One of your corporate customers is interested in a US$100 million loan for two years. Your bank decides to fund the loan from a yen loan. Your bank agrees to  borrow ¥12.8 billion at an interest rate of 1.2 percent, paid semiannually, for a period of two years. It then enters into a two-year yen/dollar swap with Citibank on a notional principal amount of $100 million (¥12.8 billion at the current spot rate). Every six months,  MB pays Citibank U.S. dollar 6 M LIBOR, while citibank makes payments to MB of 1.3 percent annually in yen. At maturity, Citibank and MB reverse the notional principals.   Assume that LIBOR6 (annualized) and the ¥/$ exchange rate evolve as follows. Calculate the net dollar amount that MB pays to Citibank("-") or receives from BT ("+") each six-month period.

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
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

You are an analyst in the treasury department  of  the Maritime Bank (MB). One of your corporate customers is interested in a US$100 million loan for two years. Your bank decides to fund the loan from a yen loan. Your bank agrees to  borrow ¥12.8 billion at an interest rate of 1.2 percent, paid semiannually, for a period of two years. It then enters into a two-year yen/dollar swap with Citibank on a notional principal amount of $100 million (¥12.8 billion at the current spot rate). Every six months,  MB pays Citibank U.S. dollar 6 M LIBOR, while citibank makes payments to MB of 1.3 percent annually in yen. At maturity, Citibank and MB reverse the notional principals.

 

  1. Assume that LIBOR6 (annualized) and the ¥/$ exchange rate evolve as follows. Calculate the net dollar amount that MB pays to Citibank("-") or receives from BT ("+") each six-month period. 

 

 

Time (months)

 

LIBOR6

 

¥/$ (spot)

 

Net $ receipt (+)/payment (-)

 

t

 

5.7%

 

128

 

 

 

t + 6

 

5.4%

 

132

 

 

 

t + 12

 

5.3%

 

137

 

 

 

t + 18

 

5.9%

 

131

 

 

 

t + 24

 

5.8%

 

123

 

 

 

What is the all-in dollar cost of MB’s loan? 

Does it make sense for MB to hedge its receipt of yen from Citibank? Explain.

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Follow-up Questions
Read through expert solutions to related follow-up questions below.
Follow-up Question

Ok, but how did you get the $630,303.03, $607,299.27, $635,114.50 and $676,422.76 under the second table listed in the columb Respective $ Value Of Receivables? 

Solution
Bartleby Expert
SEE SOLUTION
Follow-up Question

How did you calculate to get the values 

Solution
Bartleby Expert
SEE SOLUTION
Knowledge Booster
Types of Money Market Instruments
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education