Problem:
You are the cash Manager of the International Division of company X.The board has decided to increase sales in Japan. This market share strategy has to be financed in Yen with a fixed rate. You have three possibilities:
a) A syndicated $US bank loan facility at LIBOR 3 months + 1/8 percent.
b) One Japanese subsidiary of a great British Bank suggests issuing a Euroyen Bond. Taking fees into account, the cost of a four- year yen fixed rate would be 6.55 percent.
c) A fixed rate US dollar financing at the rate of 8%, from the BFCE ( the french Export Credit Bank)
You have obtained quotations from several banks in Munich for four year SWAP; the best propositions are:
- Interest Swap Rate: US Treasury + 75 -80 basis point ( One basis point=0.01%) against six month- LIBOR.
- Basis Swap :Six-month LIBOR against three- month LIBOR + 5-8 basis points
- Currency Swap: Yen/US$, 6.70-6.80%.against LIBOR 6 months.
The four- year US Treasury yield at the time was 7.70%.
Required to do:
Question 1) How can you couple the different swaps with the financing alternatives in such a way to get a fixed rate yen financing?
Question 2) Which one is the cheapest?
Note: the answer should contain an identification of the different combinations leading to a fixed rate yen financing and an evaluation the cost of each combination.
Minimum 1 page.