First of all, I am giving the task's definition (below):
Described proposals to enter forward contracts are based on an offer directed to a Polish
business entity by a foreign investment bank. The aim of the proposed deal is to hedge against
currency risk a sequence of interest payments and the last payment (compounded of principal
and interest) of a syndicated loan of 50,000,000 USD borrowed for 2 years at July 16th
The structure of the debt is bond-like what means that all the capital borrowed is repaid at
maturity together with last interest payment. First interest payment was made at October 17th
1998 and was not hedged. Interest is paid quarterly on the basis of 3M LIBOR for USD
deposits + fixed margin 4,875% p.a.
Terms of NDF contract:
Trade date: January 6th
Value dates for consecutive payments: see table below (column (1)).
Dates of spot rates calculations (as base for settlement of NDF contract): value dates – 2
Method of settlement: Marking to Market.
Value of initial margin: 3% of face value (i.e. 50,000,000 USD).
Currency differentials settlement formula:
N – (F÷S)×N,
where: N – value of payment in USD,
F – PLN/USD forward rate proposed by the foreign bank,
S – PLN/USD spot rate at value date.
PLN/USD initial spot rate: 3,4100.
PLN/USD forward rates for consecutive payments: see table below (column (3)).
Value dates for
Values and method of calculation of consecutive
forward rates for
(1) 19.01.1999 LIBOR 3M for USD + 4,875% 3,4222
(2) 16.04.1999 LIBOR 3M for USD + 4,875% 3,4933
(3) 16.07.1999 LIBOR 3M for USD + 4,875% 3,5534
(4) 18.10.1999 LIBOR 3M for USD + 4,875% 3,6046
(5) 17.01.2000 LIBOR 3M for USD + 4,875% 3,6631
(6) 17.04.2000 LIBOR 3M for USD + 4,875% 3,7115
(7) 17.07.2000 LIBOR 3M for USD + 4,875% + 50,000,000 USD 3,7566
PLN/USD spot rate for payment (1) was 3,4600 and for payment (2) – 3,9650. Interest rate for
payment (1) was 10,095%, for payment (2) – 9,885%, and for payment (3) – 9,875%.
1) PLN/USD spot rate for payment (3) = 3,8500,
2) PLN/USD spot rate for payment (4) = 3,7500 and interest rate = 9,905%,
3) PLN/USD spot rate for payment (5) = 3,8000 and interest rate = 9,925%,
4) PLN/USD spot rate for payment (6) = 3,8000 and interest rate = 10,235%,
5) PLN/USD spot rate for payment (7) = 3,7500 and interest rate = 10,135%.
As an alternative foreign bank offered a DF contract to hedge only last payment (principal and
interest – payment (7)) against currency risk at rate given in column (3) FOR payment (7).
Second alternative was an offer to buy a CIRS from the bank (to exchange floating rate
quarterly payments in USD to fixed rate annual payments in PLN). CIRS (swap rate) was
quoted by the bank at 18,10% p.a.
Now the task:
Determine what is more cost effective: to enter CIRS or NDF, or DF contract.
Cost effectiveness can be calculated either by hedge effectiveness analysis or by calculation of
effective cost in PLN of the loan for every hedging option as compared to loan not hedged.
For the purpose of calculation of effective cost of capital assume that:
1) at July 17th, 1998, the account of the borrower was debited by the amount of 48,000,000
USD as the amount of borrowed loan after deduction of commission and fees what was
exchanged to 164,303,088.70 PLN in six spot selling deals at an average PLN/USD spot
rate = 3,4230;
2) at October 17th, 1998, was paid first interest payment of 1,333,680 USD on what borrower
spent 4,709,224.08 PLN.
P.S. Maybe somebody can help about this? Where to find material and so on?
Would be very thankful