world tours, incorporated (wti) cash management swap fina 7360 srilakshmi bharthwaj
DESCRIPTION
World Tours, Incorporated (WTI) Cash Management Swap FINA 7360 Srilakshmi Bharthwaj Andrey Kolokoltsov Asal Shokati. Keeping the seasonal factor out, we designed the swap:. Revenue = Trend + Seasonal + ECI Factor + Random Trend = 1200 + (200 x Period) Seasonal = .2 x D x Trend - PowerPoint PPT PresentationTRANSCRIPT
World Tours, Incorporated (WTI)
Cash Management Swap
FINA 7360
Srilakshmi BharthwajAndrey Kolokoltsov
Asal Shokati
Period Revenue
Profit before Interest Swap
Exchange Rate (St) Predicted Revenue Trend D Seasonal Effect on Revenue Seasonal Effect on Profits
1 1700.93 -23.9256 2.04 1714.6 1400 1 280 22.4
2 1354.72 -51.6224 2.111 1385.56 1600 -1 -320 -25.6
3 2250.09 20.0072 2.103 2272.24 1800 1 360 28.8
4 1622.8 -30.176 1.989 1585.8 2000 -1 -400 -32
5 2629.77 50.3816 2.022 2670.04 2200 1 440 35.2
6 1941.6 -4.672 2.026 1956.44 2400 -1 -480 -38.4
7 3143.01 91.4408 2.033 3172.48 2600 1 520 41.6
8 2077.74 6.2192 1.899 2069.32 2800 -1 -560 -44.8
9 3397.65 111.812 1.874 3374.2 3000 1 600 48
10 2464.48 37.1584 1.924 2413.08 3200 -1 -640 -51.2
11 3735.75 138.86 1.856 3787.24 3400 1 680 54.4
12 2060.46 4.8368 1.614 2045.24 3600 -1 -720 -57.6
13 3817.29 145.3832 1.663 3792.64 3800 1 760 60.8
14 2379.8 30.384 1.671 2409.4 4000 -1 -800 -64
15 3895.08 151.6064 1.568 3952.36 4200 1 840 67.2
16 2335.96 26.8768 1.57 2383.8 4400 -1 -880 -70.4
17 4360.8 188.864 1.605 4430.8 4600 1 920 73.6
18 2506.56 40.5248 1.518 2450.84 4800 -1 -960 -76.8
19 4726.5 218.12 1.586 4759 5000 1 1000 80
20 2507.7 40.616 1.504 2611.48 5200 -1 -1040 -83.2
21 5002.83 240.2264 1.528 4951.72 5400 1 1080 86.4
22 2950.92 76.0736 1.497 2788.92 5600 -1 -1120 -89.6
23 5129.23 250.3384 1.463 5092.24 5800 1 1160 92.8
24 3176.1 94.088 1.558 3207.8 6000 -1 -1200 -96
Revenue = Trend + Seasonal + ECI Factor + RandomTrend = 1200 + (200 x Period)Seasonal = .2 x D x TrendECI Factor = .6 x (ER – 2.000) x Trend
Keeping the seasonal factor out, we designed the swap:
Swap Schedule
Interest Rate Swap Dealer
WTI
1Q 1991
2Q 1991
3Q 1991
4Q 1991
1Q 1992
2Q 1992
3Q 1992
4Q 1992
Payment 99.2
Payment 99.2*(1+0.02)
Payment 105.6
Payment 105.6*(1+0.02)
Payment 112
Payment 112*(1+0.02)
Payment 118.4
Payment 118.4*(1+0.02)
Let’s assume YTM= 8% compounded quarterly
Interest Swap pay Interest Swap Receive Cash Flows from Swap Total CF after the Swap
22.4 0 -22.4 -46.3256
0 22.848 22.848 -28.7744
28.8 0 -28.8 -8.7928
0 29.376 29.376 -0.8
35.2 0 -35.2 15.1816
0 35.904 35.904 31.232
41.6 0 -41.6 49.8408
0 42.432 42.432 48.6512
48 0 -48 63.812
0 48.96 48.96 86.1184
54.4 0 -54.4 84.46
0 55.488 55.488 60.3248
60.8 0 -60.8 84.5832
0 62.016 62.016 92.4
67.2 0 -67.2 84.4064
0 68.544 68.544 95.4208
73.6 0 -73.6 115.264
0 75.072 75.072 115.5968
80 0 -80 138.12
0 81.6 81.6 122.216
86.4 0 -86.4 153.8264
0 88.128 88.128 164.2016
92.8 0 -92.8 157.5384
0 94.656 94.656 188.744
Retroactively applying the swap, keeping the seasonal factor out.
Cash Flows after the Interest Rate Swapin Comparison to the No Hedge Strategy
Profits
VolatilityRate of Change before Swap Rate of Change after Interest Rate Swap
SD
1.157622 -0.37887 Volatility before Swap 8.609444-1.38757 -0.69442 Volatility after Swap 4.197227
-2.50826 -0.90902
-2.66959 -19.977
-1.09273 1.057227 Volatility after Interest Rate Swap and after actual profitability in period 4
-20.5721 0.595825 0.29849
-0.93199 -0.02387
16.97852 0.311622
-0.66767 0.349564
2.736975 -0.01926
-0.96517 -0.28576
29.05772 0.40213
-0.79101 0.092416
3.989679 -0.08651
-0.82272 0.130492
6.027027 0.207955
-0.78543 0.002887
4.382383 0.194843
-0.81379 -0.11515
4.914576 0.258644
-0.68333 0.067447
2.290739 -0.04058
-0.62416 0.198082
This is an accreting fixed-for-fixed interest rate swap due to the fact that our notional value grows as opposed to having a floating swap
leg.
Our exchange rate exposure is 85% of the revenue. This is due to the fact that 15% of
WTI’s expenses is in domestic currency. Swap should cover 85% of predicted revenue.
ECI/DCU=2 so ECI factor =0.
Predicted Revenue assuming Currency Swap We pay in DCU We receive in ECI and pay in Europe Swap’s Effect on Profits Currency and Interest Rate Swap Combined
1680 1428 2856 -2.688 -49.0136
1280 1088 2176 -8.5248 -37.2992
2160 1836 3672 -8.8992 -17.692
1600 1360 2720 1.056 0.256
2640 2244 4488 -2.3232 12.8584
1920 1632 3264 -2.9952 28.2368
3120 2652 5304 -4.1184 45.7224
2240 1904 3808 13.5744 62.2256
3600 3060 6120 18.144 81.956
2560 2176 4352 11.6736 97.792
4080 3468 6936 23.5008 107.9608
2880 2448 4896 66.7008 127.0256
4560 3876 7752 61.4688 146.052
3200 2720 5440 63.168 155.568
5040 4284 8568 87.0912 171.4976
3520 2992 5984 90.816 186.2368
5520 4692 9384 87.216 202.48
3840 3264 6528 111.0528 226.6496
6000 5100 10200 99.36 237.48
4160 3536 7072 123.8016 246.0176
6480 5508 11016 122.3424 276.1688
4480 3808 7616 135.2064 299.408
6960 5916 11832 149.5008 307.0392
4800 4080 8160 127.296 316.04
The both sides of the swap have the same exact value since the swap was originally designed
to create an NPV of zero for the total cash flows.
The original design of this fixed-for-fixed interest rate swap allows for the total NPV=0 -> no spread for the dealer.
We have different alternatives to pay him/ her for the deal:– Upfront fee– A fixed percentage of the growing notional value– Fee per transaction