...‘range’. A LIBOR minimum/maximum ‘range’ is pre-agreed and when LIBOR periodically resets inside this range the customer pays a lower fixed rate while outside the range a higher fixed rate is payable. The Fixed Range Swap resets every rollover and is typically structured as a zero premium instrument. Applications This product is most suited to liability managers who require a cheaper fixed cost of funds. ● Where the market view is that floating interest rates are likely to remain stable or unchanged over the life of the transaction. ● Customer Cost of Funds % Benefits ● The lower fixed rate payable is cheaper than a vanilla Interest Rate Swap. ● Known maximum cost of funds. ● No immediate ‘cost of carry’ associated with fixed rate hedging in a positive yield curve environment. ● Can be structured as a ‘zero cost’ structure, i.e. no upfront premium. Risks Should LIBOR set below the lower strike, the higher fixed rate is payable for that rollover. ● In the event that LIBOR sets even marginally above the upper strike, the higher fixed rate is payable. ● Higher Fixed Rate Fixed Range Swap Interest Rate Swap Lower Fixed Rate Lower Strike Upper Strike LIBOR % Example A liability manager has GBP debt rolling on a 6 month LIBOR rate and believes that interest rates will not move significantly over this 3 year time horizon. At the same time, this customer requires interest rate protection should their market view prove to be incorrect, and is not willing to...
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...his contributions to our organization and, undeniably, he will be deeply missed. Please join us in wishing Karol the very best of luck and success in all his future endeavors. We were also very fortunate to welcome two outstanding Harvard College students to the ERC team for a two-month internship: Ms. Nina Chen and Mr. Roland Yang. We would like to thank them for their great work and we wish them all the best for their future careers! br> And to all of you, Happy Holidays and best wishes for 2014! Newly Released Cases Case study "FX Risk Hedging at EADS" Co-authored with Professor Carl Kester, FIN, this case describes how, in 2008, EADS, the European aerospace group that owns Airbus, was faced with the decision of how best to hedge against the risks stemming from a large and growing mismatch between its dollar revenues and its euro manufacturing costs. Specifically, the company needed to decide if it would continue hedging primarily...
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...the financial crisis of 2008, GM emerged as one of the primary recipients and is a leader with great long term prospects in an industry which will only become more regulated. According to an automotive industry executive survey conducted by KPMG, “fuel efficiency remains the single biggest factor when buying a vehicle” . Additionally, KPMG reports that urbanization is becoming a prominent problem in megacities where parking space is scarce and pollution is rampant. States and international countries have begun to recognize this and influential organizations such as the California Air Resources Board (CARB) have placed laws to regulate the automotive industry. Because of these regulations in the market, GM, a producer of consumer and commercial automobiles with a market cap of $38,835.7 million, is in a better position than Navistar, a producer of commercial and military vehicles and a market cap of $1,613.2 million. Due to the rising concerns over the environment and the nature of the automotive industry, there is a risk run by both companies that changing government policies will increase costs and decrease profits in the long term. However, GM is a company whose product group is more diversified than Navistar’s. While Navistar focuses on the heavier grade automobiles such as commercial fleets, RV’s, and military trucks which require fuel-hungry and polluting engines, GM offers automobiles in both the commercial and consumer space. This allows GM to focus on a mix of light and...
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...International Finance: A Course Overview Mihir A. Desai* Harvard University and NBER ABSTRACT This paper describes the International Finance course at Harvard Business School for instructors considering adopting the associated material. The paper begins by arguing that the forces of globalization have fundamentally changed the scope and activities of firms thereby altering the practice of finance within these firms. As a consequence of an increasing reliance on tightly-integrated foreign operations, a parallel world of finance has been opened within every multinational firm and this world has, heretofore, been overlooked. The course materials are designed to address the many aspects of financial decision making within global firms prompted by these changes that are not addressed in traditional materials. The paper provides an overview of the structure of the course and its seven modules with particular emphasis on the three modules that constitute the core of the course. The paper also describes an analytical framework that has been developed through the creation of the course materials to guide critical financial decisions on financing, investment, risk management and incentive management within a multinational firm. This framework emphasizes the need to reconcile conflicting forces in order for multinational firms to gain competitive advantage from their internal capital markets. The paper concludes with a discussion of the course's pedagogical approach and detailed descriptions...
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...practice sets. Question 1. Suppose you discover a treasure chest of $10 billion in cash. (a) Is this a real or financial asset? (b) Is society any richer for the discovery? (c) Are you wealthier? (d) Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of the discovery? Question 2. Consider Fig. 1.5 in BKM6. (a) Are these American gold certificates primitive or derivative securities? (b) Is the issue being described a primary or secondary market transaction? Question 3. Suppose that you are an executive of General Motors (GM), and that a large share of your potential income is derived from year-end bonuses that depend on GM’s annual profits. (c) Would the purchase of GM stock be an effective hedging strategy if yo u were worried about the uncertainty surrounding your bonus? (d) Would the purchase of Toyota stock be an effective hedging strategy? (e) What would be another better hedging strategy, if any? Question 4. What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to...
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...The Finance Function in a Global Corporation Historically, the finance functions in large U.S. and European firms have focused on cost control, operating budgets, and internal auditing. But as corporations go global, a world of finance opens up within them, presenting new opportunities and challenges for CFOs. Rather than simply make aggregate capital-structure and dividend decisions, for example, they also have to wrestle with the capital structure and profit repatriation policies of their companies’ subsidiaries. Capital budgeting decisions and valuation must reflect not only divisional differences but also the complications introduced by currency, tax, and country risks. Incentive systems need to measure and reward managers operating in various economic and financial settings. The Globally Competent Finance Function The existence of what amounts to internal markets for capital gives global corporations a powerful mechanism for arbitrage across national financial markets. But in managing their internal markets to create a competitive advantage, finance executives must delicately balance the financial opportunities they offer with the strategic opportunities and challenges presented by operating in multiple institutional environments, each of which has it own legal regime and political risks. There is also a critical managerial component: What looks like savvy financial management can ruin individual and organizational motivation. As we’ll see in the following pages, some...
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...practice sets. Question 1. Suppose you discover a treasure chest of $10 billion in cash. (a) Is this a real or financial asset? (b) Is society any richer for the discovery? (c) Are you wealthier? (d) Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of the discovery? Question 2. Consider Fig. 1.5 in BKM6. (a) Are these American gold certificates primitive or derivative securities? (b) Is the issue being described a primary or secondary market transaction? Question 3. Suppose that you are an executive of General Motors (GM), and that a large share of your potential income is derived from year-end bonuses that depend on GM’s annual profits. (c) Would the purchase of GM stock be an effective hedging strategy if yo u were worried about the uncertainty surrounding your bonus? (d) Would the purchase of Toyota stock be an effective hedging strategy? (e) What would be another better hedging strategy, if any? Question 4. What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to...
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...and francs, for two points in time: 2/1/XX and three months latter, 5/1/XX. PLEASE READ AND USE THE QUOTES CAREFULLY. I WILL NOT GIVE PARTIAL CREDIT FOR ERRORS DUE TO MISREADING OR USING THE WRONG QUOTES. 2/1/XX 5/1/XX a. If you were a currency speculator, based on the information presented, would you rather take a long or a short position in the three-month forward contract for British pounds on 2/1/XX?: Long b. On 2/1/XX, GM sold a three-month forward contract for 250 million yen to CitiCorp. Based on this transaction, indicate whether each statement listed below is either true or false: (5 points) Statements On 5/1/XX, GM will have to pay $1,875,250 to CitiCorp On 2/1/XX, GM will have to deliver 250 million yen to CitiCorp On 5/1/XX, CitiCorp will have to pay $2,071,250 to GM On 5/1/XX, CitiCorp will have to deliver 250 million yen to GM On 5/1/XX, CitiCorp will have to pay to $2,090,000 GM True or false F F F F F c. Based on the information presented in part (h), what is the total dollar profit or loss in the forward market transaction for GM ? Please indicate the dollar amount, and also if it is a profit or a loss. (2 points): (0.007501 - 0.008285) * 250,000,000 = - $ 196,000 Q2. (4 points) Compared to the Forward market, in the Foreign Currency Futures market: (i) Transaction costs are based on: brokerage fee (ii) Margin is: required (iii) Trading is done via: an exchange (iv) Settlement is done: on a daily basis Q3. (8 points) Listed below are the closing spot...
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...for Suv’s . Especially for customers who can afford the biggest SUVs but think twice because of gas prices, but $2 gas is already driving buyers into smaller SUVs and cars. Interactive survey this month found that nearly 50 percent of car buyers are planning to switch to more fuel-efficent vehicles. General Motors accuses Ford of using gas prices to rationalize the double-digit sales drop of its once hot SUVs like the Lincoln Navigator. Ford counters that GM is pumping up its SUV sales with giant $6,000 rebates. Chrysler CEO Dieter Zetsche wishes his competitors would just quit bickering. "I don't think any one of us is served well by trying to talk up the crisis," he told NEWSWEEK. "People might say, 'Now that you mention it, I really shouldn't buy a new car”. While Zetsche, is concerned about the new factors pushing up the cost of oil, he still expects pump prices to make their usual summer swoon. "This crisis scenario always pops up in May and June," he says, "and settles down in August and September." GM also sees high gas prices as a...
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...ORGANIZATION & CULTURE FINANCE & ACCOUNTING MARKETING MANAGING TECHNOLOGY MARKETING STRATEGY & COMPETITION HUMAN RESOURCES MARKETING ORGANIZATION & CULTURE MANAGING TECHNOLOGY FINANCE & ACCOUNTING ORGANIZATION & CULTURE MARKETING STRATEGY & COMPETITION HUMAN RESOURCES MANAGING TECHNOLOGY FINANCE & ACCOUNTING ORGANIZATION & CULTURE MARKETING STRATEGY & COMPETITION HUMAN RESOURCES MANAGING TECHNOLOGY MARKETING STRATEGY & Honing Your HUMAN RESOURCES ORGANIZATION & CULTURE FINANCE & ACCOUNTING HUMAN RESOURCES COMPETITIONCompetitive Edge Finance Function in a Global Corporation The H 108 Harvard Business Review | by Mihir A. Desai HISTORICALLY, the finance functions in large U.S. and European firms have focused on cost control, operating budgets, and internal auditing. But as corporations go global, a world of finance opens up within them, presenting new opportunities and challenges for CFOs. Rather than simply make aggregate capital-structure and dividend decisions, for example, they also have to wrestle with the capital structure and profit repatriation policies of their companies’ subsidiaries. Capital budgeting decisions and valuation must reflect not only divisional differences but also the complications introduced by currency, tax, and country risks. Incentive systems need to measure and reward managers operating in various economic and financial settings. The existence of what amounts to internal markets for capital gives global corporations a powerful mechanism...
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...chunk of its revenues come from sales of its sports cars in America. Lacking BMW's natural hedge, Porsche uses financial hedging to minimise the short-term impact of currency swings. “Grappling with the Strong Euro,” The Economist, June 5, 2003, p. 53. The USA represents approximately 50 percent of our total business. There are a few other countries that also use US dollars. This situation will not change much in [the] future. That is why we are hedged against currency fluctuation for the next three to four years. In our books the dollar and the yen are above the actual rates. That allows us time to react to any currency movement. “Porsche Roars Past Sales Targets,” Automotive News Europe, September 22, 2003, p. 20. It was January 2004 and Porsche—the legendary manufacturer of performance sports cars—wished to reevaluate its exchange rate strategy. Porsche's management had always been unconcerned about the opinions of the equity markets, but its currency hedging strategy was becoming something of a lightning rod for criticism. Although the currency hedging results had been positive, many experts believed that Porsche had simply been “more lucky than good.” There was growing concern among analysts that the company was actually speculating on currency movements. Analysts estimated that more than 40% of earnings were to come from currency hedging in the coming year. Porsche's President and Chief Executive Officer (CEO), Dr. Wendelin...
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...Gold Fundamental Report February 2012 Disclaimer This report has been prepared by the Knowledge Management Department of NCDEX Limited for the purpose of information dissemination. The facts are reported from publications and have not been checked for authenticity. NCDEX and its employees will not be responsible for any decision taken by the reader based on this report and are adv advised to take independent advise on the commodity(is) dealt in this report . For more information contact Ashwin Dilip Vidhate Knowledge Management Group NCDEX Ltd. ashwin.vidhate@ncdex.com +91 022 6640 6836 2 Table of Contents 1. Introduction ....................................................................................................................................................................................... 4 2. Gold supply ........................................................................................................................................................................................ 5 Gold supply: Indian scenario............................................................................................................................................................ 14 3. Gold demand ..................................................................................................................................................................................... 15 Gold demand: Indian scenario ..................................................
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...Bus 171a chap 1-8 HW Chapter 1 Hw probs 2,3,8,9,15-18 2) what is the difference between the claim of a debtholder of GM and an Equity holder of GM? The claim of the debt holder is established by contract, which specifies the amount and timing of periodic payments in the form of interest as well as term to maturity of the principal. The debt holder stands as a creditor and in case of default, he has a prior claim on firm assets over the equity-holder. The equity holder has a residual claim to assets and income. He can receive funds only after other claimants are satisfied. Income is in terms of dividends, the amount and timing of which are not certain. 3) What is the basic principle in determining the price of a financial asset? The basic principle is that the price of any financial asset is equal to the present value of its expected cash flow, even if the cash flow is not knows with certainty. The price of any financial asset is the present value of the expected cash flows or a stream of payments over time. Thus, the basic variables in determining the price are: expected cash flows, discount rate and the timing of these cash flows. 8) explain the difference between each of the follow a. The money market is a financial market of short-term instruments having a maturity of one year or less. The capital markets contain debt and equity instruments with more than one year to maturity; b. The primary market deals with newly issued financial...
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...International Management, 7e (Deresky) Chapter 1: Assessing the Environment Political, Economic, Legal, Technological 1) Which of the following is characterized by networks of international linkages that bind countries, institutions, and people in an interdependent global economy? D) globalization 2) All of the following factors contribute to globalization EXCEPT ________. C) higher number of trade restrictions 3) Which of the following is the most highly globalized in regards to economic integration, technological connectivity, personal contact, and political engagement? A) Singapore 4) Most small and medium-sized enterprises (SMEs) are ________. C) contributing to their national economies through exporting 5) Gayle Warwick Fine Linen owes its success as a global business primarily to the firm's ________. B) labor outsourcing in Vietnam 6) Which of the following are the three dominant currencies in the world today? C) Euro, Japanese yen, U.S. dollar 7) Most of today's world trade takes place in which three trade blocs? C) European Union, Asia, and the Americas 8) The European Union currently consists of how many nations? B) 27 9) Which of the following is NOT one of the Four Tigers? D) Thailand 10) Which of the following best explains China's success in exporting? A) low costs and steady stream of capital 11) Which of the following is NOT a true statement about India? A) India's biggest contributor to growth is its excellent infrastructure. 12) India's economic boom is most likely...
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...Number I. C12- Best Practices—WACC No Questions II. C2- Bill Miller & Value Trust 2 III. C5- Financial Detective, 2005 Contained in Case IV. C7- Body Shop Intl* Contained in Case, but see page 3 V. C6- Krispy Kreme Doughnuts, Inc. 4 VI. C17- The Investment Detective* Contained in Case VII. C28- Intro. to Debt Policy & Value* No Questions, but review M & M Theory on debt and value of the firm. VIII. HBS Case- “Leveraged Betas and the Cost of Equity No Questions IX. C16- The Boeing 7E 7* 5 X. C26- Jet Blue Airways, IPO Valuation* 6 XI.a C35- Merton Electronics 7 XI.b C36- Carefour S. A.* 8 XI.c C44- Palamon Capital Partners* 9 XII. GM Dividend Policy Negotiation (Information to be provided by Dr. Kiss) * Note: Excel Spreadsheets containing some of the exhibits from the case are available for this case at www.mhhe.com/bruner5e FIN 620, CASE QUESTIONS DR. KISS Please allow these questions to serve as a guide when you prepare your case write-up in accordance with the syllabus or other instructions Case 2- Bill Miller & Value Trust Suggested Questions for Your Preparation of the Case. 1. How well has Value Trust performed in recent years? In making that assessment, what benchmark(s) are you using? How do you measure investment performance? What does good performance mean to you? 2. What might explain the fund’s performance? To what extent do...
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