Question 1: While market-based hedging instruments can be used to offset or counter uncertainties in interest rates and exchange rates as they impact the income statement, balance sheet hedges require a different approach. Assume you are the CFO of Toyota trying to offset the balance sheet risks associated with Toyota's $4.5 billion investment in Georgetown, Kentucky. Please explain how this risk would be offset by a combination of a 15-year Euro Dollar Bond with equal repayments in the last five years and a floating rate 10-year syndicated Euro-Dollar bank loan combined with an interest rate swap. Assume a fifteen-year straight-line amortization of the new Georgetown facility.
Question 2: Look at the JAL FX loss scenario in the Additional Text Readings where JAL lost as much as or more in FX than the $800 million value of the planes it was purchasing. Then calculate JAL's cost if it had used a different type of hedge, borrowing US$ to buy U.S. government bonds that it then cashed as each plane was purchased. Generally one can borrow up to 95% of the value of U.S. government bonds with the borrowing cost normally about .25% or 25 basis points above the yield on the bonds. Assume that the yield on the bonds is 8% and that they borrow for the full 10 years noted in the case.