Swaption
Discuss the usefulness of swaptions (swap options) relative to the current economic environment. Give three specific examples of how a bank can use this derivative both for risk management and speculation.
Please provide citations.
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The current economic environment is such that the interest rates are expected to increase. The first reason is that the US Federal Reserve is likely to decrease quantitative easing. This is expected to cause interest rates to increase. The second reason is that the Fed rate of 0.25% is also likely to be increased in near ...
Solution Summary
The answer to this problem explains the use of swaptions in the current economic background. The references related to the answer are also included.
How would you advise the company to handle the repatriation?
Scenario:
Primetime Systems, Inc. now has total worldwide revenues of over $820 million forecast for this coming year.
You have operations in the United States of $450 million with a 12% ROS (return on sales),
operations in Germany of ?200 million with an a return on sales (ROS) of 11%,
and operations in Shanghai, China, of 990 million yuan with an ROS of 9%.
You expect to repatriate all the ROS to the U.S. when available in 12 months.
Assignment
1. Determine the spot and 12-month forward exchange rates and determine any change in the ROS repatriated in 12 months based on exchange rates versus the current forecast.
2. Describe the repatriation using a spot transaction, an outright forward, and a foreign-exchange swamp.
3. Would there be any use or benefit in using a currency option or currency swaption?
4. Describe each.
5. How would you advise the company to handle the repatriation?
6. Please cite all references
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