Académique Documents
Professionnel Documents
Culture Documents
9-2
9-3
9-4
9-5
9-6
9-7
9-8
Exhibit 9.4 Trident Corporations Costs and Cash Flows in Servicing a Floating Rate Loan
9-10
9-11
9-12
9-13
9-15
9-16
9-17
9-18
A corporate borrower of good credit standing has existing floating-rate debt service payments. The borrower, may conclude that interest rates are about to rise. In order to protect the firm against rising debt-service payments, the companys treasury may enter into a swap agreement to pay fixed/receive floating. This means the firm will now make fixed interest rate payments and receive from the swap counterparty floating interest rate payments.
9-19
9-20
9-21
9-22
9-23
Exhibit 9.9 Trident Corporations Interest Rate Swap to Pay Fixed/Receive Floating
9-25
9-26
9-27
9-29
Exhibit 9.11 Trident Corporations Currency Swap: Pay Swiss Francs and Receive U.S. Dollars
9-30
9-31
Counterparty Risk
Counterparty risk is the potential exposure any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contracts specifications. Counterparty risk has long been one of the major factors that favor the use of exchange-traded rather than over-the-counter derivatives. Most exchanges, like the Philadelphia Stock Exchange or Chicago Mercantile Exchange are themselves counterparty to all transactions. The real exposure of an interest or currency swap is not the total notional principal, but the mark-to-market values of differentials in interest of currency interest payments.
9-32
Mini-Case Questions: McDonalds Corporations British Pound Exposure How does the cross-currency swap effectively hedge the three primary exposures McDonalds has relative to its British subsidiary?
How does the cross-currency swap hedge the long-term equity exposure in the foreign subsidiary? Should Anka and McDonalds worry about OCI?
Copyright 2010 Pearson Prentice Hall. All rights reserved.
9-33
Chapter 9