...B.F Goodrich/Rabobank interest rate swap case By: Mitchell Gahan 13179537 James Grimard 13191612 Josh Hutchins 13220396 Lecturer: Colette Southam Due Date: 17/06/13 The first key issue in the B.F Goodrich/Rabobank interest rate swap case was why they felt the swap was needed? B.F Goodrich was the fourth largest U.S producer of tires and the largest U.S producer of polyvinyl chloride (PVC) resins and compounds. During 1982 Goodrich announced a $33million dollar loss and needed to borrow 50 million to fund its ongoing financial needs. In addition Goodrich was disinclined to borrow the funds in the short term as they didn’t want to compromise its future flexibility by borrowing short term. The company also felt due to the general level of interest being so high and its downgraded credit rating to BBB- that long-term fixed-rate money would be too expensive, estimated at approximately 13% on a 30-year corporate debenture. Another key Issue in the case was how could Goodrich reduce the rate of borrowing? During 1983 currency swaps and interest rate swaps were still a relatively new financial instrument. Although, the nature of a swap could be quite beneficially to both parties in theory as long as the swap was set up correctly. In theory Goodrich could reduce the rate of borrowing through an interest rate swap by paying a fixed rate and receive a floating rate payment. In this circumstance Goodrich could match its floating rate payments with their floating rate...
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...Contents: Interest rate swap basics2 Excel work4 References8 Interest rate swap basics Swaps, being highly liquid derivatives, are not traded on stock exchange, but facilitated by over-the-counter (OTC) trading. Interest rate swap is an arrangement between two parties whereby they exchange one set of interest payment for another. The most widespread arrangement is when fixed-rate interest payments are exchange for floating-rate interest payment on some notional amount over the time. This notional amount is generally not exchanged between counterparties, but is used only for calculation of the size of cash flows to be exchanged, and what is more, usually only resulting cash flow (difference between fixed and floating interest rate payments) is paid. The simplest swap structure is a vanilla interest rate swap, in which one party receives a fixed interest rate agreed in advance and the other party a variable interest rate. The provisionы of such a swap are the following: • Notional (value to which interest rates are applied to) • Fixed interest rate • Floating interest rate • Frequency of payments • Contract period Most swaps are arranged so that their value is zero at the starting date. For US dollar swaps, floating rates are typically the 3-month or 6-month LIBOR rates prevailing over the period before the interest payment is made. The interest rates are determined in advance or equivalently, the payments are made in arrears. In practice, there are many...
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...Interest Rate Swaps | | | Janis Vera Todd | BUS 250 International BusinessProfessor Masudur Chowdhury | 3/12/2010 | | The first article that we will look at deals with interest rate swaps is “New Jersey Swap for Unsold Bonds Cost $22,000 a Day (update2)”. This article is about mismanagement and misunderstanding of financial obligations on behalf of New Jersey and the officials of 2004. This administration used financial backing by the Bank of Montreal in an interest-rate swap that was linked to unsold bonds. They were basically gambling with the unknown future of the market that the funds are tied to with a floating interest rate to help cover the budget of building new schools in the future. The problem soon became apparent when the changes of fixed rates were moved to floating interest rates which started to rise. The swap rates were bench marks for debt and as the gap began to widen the bank rates started to change to allow the bank to make money and forcing New Jersey to go further into debt. They are now trying to reorganize what financial debts are left to get lower interest rates and to be able to sell off the remaining swaps in 2012. This way they can refinance without incurring the fifty million dollar penalty for canceling the contract with the approval of the Treasury department. Because James Florio and James McGreevey, the governors at the time, went through with these financial decisions without thought out and understanding of the swap more clearly...
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...Spencer Whitworth Ryan Scoville Austin Gray CTP 1: Credit Default Swaps With the financial crisis behind us, it is worth asking whether Credit Default Swaps (CDSs) were a positive development in our economic system. Many blamed the interconnections generated by primary and secondary CDS trading for the implosions that occurred in 2007, when the underlying assets on which the majority of CDSs were based - mortgage-backed securities - began to default. The media agreed, labeling CDSs with terms such as “weapons of mass financial destruction.” There are a number of aspects to CDSs, however, that skeptics and pundits overlooked. While history and intuition suggest important risks associated with CDSs that issuers, owners, and regulators must consider, there are a number of unexpected ways CDSs improve debt capital markets and our economy as a whole. On balance, these benefits shed optimistic perspectives on the merits of CDSs. If markets can learn from past mistakes, the advantages of CDSs render them indispensable financial instruments that contribute to better financing and information-gathering capability in our economy. Contrary to popular belief, the conceptual underpinnings of credit default swaps (CDSs) are surprisingly similar to those of traditional insurance policies. CDSs arose out of an ordinary transaction: a 1994 deal between J.P. Morgan, the European Bank of Reconstruction and Development (EBRD), and ExxonMobil. In return for an insurance-style premium to...
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...Assignment 5 What is a credit default swap (CDS)? How does it work? Do you think it contributed to the 2008 financial crisis? Should it be banned in the market? Basically, credit default swap is a credit derivative which its function is like insurance contract between two counterparties on one or more companies' loan or bond. One party who buys the protection called "protection buyer" has to pay a periodic premium to another party called "protection seller" until expiry of the contract, in return for protection against a credit event (financial difficulty such as bankruptcy, failure to pay or restructuring) of a known reference entity (company). The protection buyer receives protection in form of the right to sell bonds issued by a particular company for their face value or receives principal amount of loan if the company defaults. An example from the case, Charles Bank International (CBI) wanted to lend $50 million to CapEx Unlimited (CEU) company. However, if the amount was lend to CEU, the bank would have high risk exposure to the company and the risk exceeded CBI's risk guidelines. Thus, CBI bought a CDS on CEU company from First American Bank (FAB), these method would mitigate the extra credit risk for CBI from the new $50 million loan. CBI had to pay a periodic fee to FAB until the CDS expired. In this case, if CEU company defaulted before the contract expired, FAB would pay the principal loan amount. The settlement in the event of default involves either "physical...
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...A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults. It was invented by Blythe Masters from JP Morgan in 1994. In the event of default the buyer of the CDS receives compensation (usually the face value of the loan), and the seller of the CDS takes possession of the defaulted loan.[1] However, anyone can purchase a CDS, even buyers who do not hold the loan instrument and who have no direct insurable interest in the loan (these are called "naked" CDSs). If there are more CDS contracts outstanding than bonds in existence, a protocol exists to hold a credit event auction; the payment received is usually substantially less than the face value of the loan.[2] Since 1 December 2011 the European Parliament has banned naked CDSs on the debt for sovereign nations.[3] Credit default swaps have existed since the early 1990s, and increased in use after 2003. By the end of 2007, the outstanding CDS amount was $62.2 trillion,[4] falling to $26.3 trillion by mid-year 2010[5] but reportedly $25.5[6] trillion in early 2012.[7] CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency.[8] During the 2007-2010 financial crisis the lack of transparency in this large market became a concern...
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...BUS 250 International Business- Impact of Interest Rate Swaps Get Tutorial by Clicking on the link below or Copy Paste Link in Your Browser https://hwguiders.com/downloads/bus-250-international-business-impact-interest-rate-swaps/ For More Courses and Exams use this form ( http://hwguiders.com/contact-us/ ) Feel Free to Search your Class through Our Product Categories or From Our Search Bar (http://hwguiders.com/ ) Review the ABS swaps attachment and design a swap that could potentially be used in your company acquisition in the following countries: Japan, China, and the United Kingdom (UK). In a 3-5 APA paper provide an analysis to Dorchester, Inc. management advising them of the swap options you have selected and why it would be suitable for the acquisition. http://interestrateswaps.info/ ABS Swaps Swap Funds Flows in a Typical Asset Backed Commercial paper Conduit: In the above example, The Issuer sells receivables to a Special Purpose Vehicle that is a bankruptcy-remote entity. This means that it cannot be consolidated into the bankruptcy estate of the Issuer if the Issuer were to file for bankruptcy. The SPV issues Certificates to the Conduit in exchange for cash. The conduit raises the cash to pay for the Certificates by issuing commercial paper. The Swap transaction is required because the portfolio of receivables that has been sold and converted into Certificates is a portfolio of fixed rate receivables. They are being funded with floating rate...
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...Question 7. CDS (Credit Default Swap) is designed to transfer risk from bond holders to CDS issuers. Bond holders buy bonds from a company and buy CDS from insurance company at the same time to make sure even the company default; the bond holders can get the par value back from insurance company. We will look at the CDS spread of Delphi for this question. After we plotted in the data, we find out that the overall CDS spread are abnormally large during the year of 2005 and 2008. The high CDS spreads indicates the unsuccessful operation of Delphi at that time and investors perceiving the possibility of Delphi defaulting on its bond payment. Delph is one of the world's largest automotive parts manufacturers originated in the U.S. The company originally belonged to General Motors (G.M.) and spun off in 1999 as an independent company. However, facing the increasing competition in the automotive industry, inability to repay its debt, and weakened by the high labor costs that set by the spinoff agreement with GM, Delphi filed for Chapter 11 bankruptcy protection on Oct. 8, 2005 to reorganize its struggling U.S. operations. After Delphi release the news of filing bankruptcy, the bond holders loosed confidence on Delphi and believed Delphi might default on its bond repayment. Bond holders started to sell Delphi bonds or purchase CDS to cover the bonds that they held. The CDS spread in 2005 therefore increased. The high CDS indicates the high possibility of Delphi defaulting on its...
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...préstamo a tasa fija. Diseñe un swap que produzca un neto de 0.1% anual para un banco que actúe como intermediario y que parezca igualmente atractivo para ambas compañías. A tiene una ventaja comparativa evidente en los mercados de tasa fija, pero desea solicitar fondos del préstamo a una tsa variable. B tiene una ventaja comparativa evidente en los mercados a tsa variable, pero desea solicitar préstamos a una tasa fija. Esto proporciona la base para un swap. Existe un diferencial de 1.4% anual entre las tasas fijas que se ofrecen a las dos compañías, y un diferencia de 0.5% anual entre las tasas variables que se ofrecen a las dos compañías. La ganancia total para todas las partes proveniente del swap es: Por lo tanto de 1.4 – 0.5 = 0.9% anual. Ya que el banco obtiene el 0.1% anual de esta ganancia, el swap debería hacer que tanto A como B estuvieran 0.4 anual en una mejor posición. Esto significa que dicho swap debería conducir a A a solicitar fondos en préstamo a la tasa LIBOR – 0.3%, y debería conducir a B a solicitar fondos en préstamo al 6%. El acuerdo adecuado es, por lo tanto, como se muestra en el diagrama anterior. 7.2. Un swap sobre una tasa de interés de $100 millones tiene una vida restante de 10 meses. En los términos del swap, se intercambia la tasa LIBOR a seis meses por una tasa de 7% anual (con capitalización semestral). El promedio para la tasa demanda – oferta que se está intercambiando por una tasa LIBOR a seis meses en swap de todos los plazos de vencimiento...
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...CHAPTER 7 Swaps Practice Questions Problem 7.1. Companies A and B have been offered the following rates per annum on a $20 million five-year loan: | |Fixed Rate |Floating Rate | |Company A |5.0% |LIBOR+0.1% | |Company B |6.4% |LIBOR+0.6% | Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies. A has an apparent comparative advantage in fixed-rate markets but wants to borrow floating. B has an apparent comparative advantage in floating-rate markets but wants to borrow fixed. This provides the basis for the swap. There is a 1.4% per annum differential between the fixed rates offered to the two companies and a 0.5% per annum differential between the floating rates offered to the two companies. The total gain to all parties from the swap is therefore [pic]% per annum. Because the bank gets 0.1% per annum of this gain, the swap should make each of A and B 0.4% per annum better off. This means that it should lead to A borrowing at LIBOR [pic]% and to B borrowing at 6.0%. The appropriate...
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...percent. They would prefer the fix because they would want stability Slide 19.14 Here is the summary of their borrowing opportunities, Bank A would prefer LIBOR and Firm B 11.75 Fix Slide 19.15 Speculating that interest rates will go up in the future, Bank A starts to look at better opportunities , it gets the following offer from SWAP BANK. Slide 19.16 Instead of paying rates at LIBOR , pay us LIBOR less (.125) and in the meantime deposit with us 10M and we will pay you 10.375 rate interest for 5 years. Remember Bank A has excellent credit and it can burrow from outside at 10% fix. So what Bank A does is burrow 10M from outside at 10 % fix and get 10.375 and in the meantime have an extra .125 discount on their LIBOR rate this will translate to .5% rate saving which is equivalent to $ 50,000 per year for five years. Slide 19.17 Now let ‘s see how the SWAP BANK came up with these rates. Company B speculating that the interest rates will go down in the future in US and feeling that 11.75% is an expensive rate to pay they start looking for better opportunities , this is where the SWAP Bank comes into the...
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...derivados financieros son los siguientes: * Su valor cambia en respuesta a los cambios de precio del activo subyacente. Existen derivados sobre productos agrícolas y ganaderos, metales, productos energéticos, divisas, acciones, indices bursátiles, tipos de interés, etc. * Requiere una inversión inicial neta muy pequeña o nula, respecto a otro tipo de contratos que tienen una respuesta similar ante cambios en las condiciones del mercado. Lo que permite mayores ganancias como también mayores pérdidas. * Se liquidará en una fecha futura. * Pueden cotizarse en mercados organizados (como las bolsas) o no organizados ("OTC") [editar] Tipología [editar] Dependiendo del tipo de contrato * Permutas o intercambio ("swap") * Futuros (en Mercados Organizados)/Forwards (en OTC) * Opciones o "Americana" (ejecutable durante toda la duración del contrato) o...
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...POLICY RESEARCH WORKING PAPER 1667 Dealing with Commodity Price Uncertainty Plantos Varangis Dont Larson Market liberalization has increased the appeal of commodity derivative instruments (such as futures, options, swaps, and commodity-linked notes)as a means of managing price uncertainty. many In emerging countries both government and the private sector are increasinglyusing these instruments. The World Bank International Economics Department Commodity Policy and Analysis Unit October 1996 POLICYRESEARCH WORKINGPAPER1667 Summary findings Liberalization in commodity markets has brought profound changes in the way price risks are allocated and managed in commodity subsectors. Price risks are increasingly allocated to private traders and farmers rather than absorbed by the government. The success of market reform depends on the ability of the emerging private sector to make full use of the available range of modern commodity marketing, price risk management (such as futures, options, swaps, commodity bonds, and so on), and financing instruments. Because farmers do not generally have direct access to these instruments, interinediaries must be developed. Larger private traders and banks are in the best position to become these intermediaries. Preconditions needed for accessing modern commodity marketing, price risk management, and financing instruments are: * Creating an appropriate legal, regulatory, and institutional framework. * Reducing government...
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...1. Introduction The Global Derivatives Market how it is work a- Fundamentals and Market Characteristics 2.1 Basics of derivatives Derivatives are totally different from securities. They are financial instruments that are mainly used to protect against and manage risks, and very often also serve arbitrage or investment purposes, providing various advantages compared to securities. Derivatives come in many varieties and can be differentiated by how they are traded, the underlying they refer to, and the product type. Definition of derivatives A derivative is a contract between a buyer and a seller entered into today regarding a transaction to be fulfilled at a future point in time, for example, the transfer of a certain amount of US dollars at a specified USD-EUR exchange rate at a future date. Over the life of the contract, the value of the derivative fluctuates with the price of the so-called “underlying” of the contract – in our example, the USD-EUR exchange rate. The life of a derivative contract, that is, the time between entering into the contract and the ultimate fulfi llment or termination of the contract, can be very long – in some cases more than ten years. Given the possible price fluctuations of the underlying and thus of the derivative contract itself, risk management is of particular importance.1) Derivatives must be distinguished from securities, where transactions are fulfilled within a few days (Exhibit 1). Some securities have derivative-like characteristics...
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...“Liability Management at General Motors" Mr. Bello was in charge making the decision of whether or not it was ideal to modify GM’s interest rate exposure, and how. If he did nothing, it would insulate GM’s cash flows fully from any interest rate exposure if they locked in at a rate of 7.63% plus transaction costs. However, they would not be able to lower the cost of debt in the event that interest rates declined. If he went with Swaps, they would use the current 6-month LIBOR rate of 4.31%, which was likely never to go below 4%, making them unsuitable for insulating GM’s cash flows. The option on treasury notes would flatten the long-term yield curve, and the long-term yield rate was to remain high above the current level. Price at maturity would operate below the bull spread making this option also not suitable for GM’s interest rate exposure. If GM opted to do benchmark caps, selling a cap with an exercise price of 10% would meet GM’s objective about 65% of the time, however there is a huge risk of unlimited losses at interest rates above 10%. Still, this is not a bad option. Swaptions are another option that isn’t terrible for GM. This option protects GM pretty well because if interest rates are high gm would be paying higher floating rates, however they’d be offset by the premium received for selling the option. If interest rates were low, the swaption would not be exercised, and GM would again be paying the fixed rate obligation, but lowered costs of borrowing...
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