Cross Currency Swaps. Savill Consulting 1

Transcription

1 Cross Currency Swaps Savill Consulting 1

2 A forward FX rate is calculated using a no-arbitrage pricing model Assume a US-based investor has US$10.50 million to invest and a 12-mo time horizon. The current rates in the market are as follows The investor is faced with two investment choices, being: Alternative 1 Invest US$10.50 mm for 12 mo at 0.65% FX risk = none Alternative 2 Spot AUD/USD rate mo USD rate 0.65% 12-mo AUD rate 3.62% Exchange US$10.50 mm at the spot rate and invest proceeds of A$10.00 mm for 12 mo at 3.62%. FX risk = AUD depreciates against the USD Alternative 1 Alternative 2 t 0 Invest $10,500,000 for % t 0 Invest A$10,000,000 for % t 1 Principal $10,500,000 t 1 Principal A$10,000,000 Interest (Act/360 basis) $69,198 Interest (Act/365 basis) A$362,000 $10,569,198 A$10,362,000 Breakeven Rate = 10,569,198 10,362,000 = Savill Consulting 2

3 The forward FX formula can be distilled as follows. The general forward rate formula is represented by the following: Forward FX Rate = Spot x ( rt x t) ( ) r U x t where r T = int. rate of the term currency r U = int. rate of the unit currency t = time period Ccy Spot 1 mo 2 mo 3 mo 6 mo 12 mo AUD CAD CHF EUR GBP JPY Spot Forward points Forward outright NZD SGD Savill Consulting 3

4 Corp. requires 5-year USD financing Date: March 2013 Corp., a Hong Kong-based (and therefore considered a USD-referenced) company, wishes to borrow US$525 million over 5-years which they could do by issuing a USD bond with an indicated coupon of 1.75%. However, they have been informed by their bankers that there are some good opportunities in the kangaroo market: it has been suggested that they issue an AUD bond in A$500 million instead (the equivalent of US$525 million at the current exchange rate of ) with a coupon of 4.50%, and swap back into USD using: (a) a series of FX forwards, or (b) a cross currency swap 1 2 USD 3 USD USD 1.75% AUD AUD 4.50% AUD AUD 4.50% US$ Bond A$ Bond A$ Bond AUD bond plus a series of FX forwards AUD bond plus a currency swap USD coupon =... USD coupon =... Savill Consulting 4

5 2. AUD bond plus a series of FX forwards: USD cost A$11.25 mm coupon every 6 mo US$ equivalent of A$ payments at appropriate forward rates A$ mm principal at maturity Tenor AUD coupon & principal FX Rate Cash Flow in USD Spot - 500,000, ,000,000 6-mo 11,250, ,640, mo 11,250, ,474, mo 11,250, ,322, mo 11,250, ,190, mo 11,250, ,031, mo 11,250, ,872, mo 11,250, ,733, mo 11,250, ,598, mo 11,250, ,465, mo 511,250, ,725,623 IRR% 4.50% 1.78% Savill Consulting 5

6 3. AUD bond plus a currency swap: USD cost US$525 mm A$500 mm 1. At start 5-yr A$ Bond A$500 mm US$ Fixed 2. Over life 5-yr A$ Bond US$525 mm A$500 mm 3. At maturity 5-yr A$ Bond A$500 mm Savill Consulting 6

7 3. AUD bond plus a currency swap: USD cost USD Interest Rate Swap USD/AUD Basis Swap Tenor Treasury Mid Spread Tenor A$ Spread 1 year 0.17% years 0.28% years 0.39% + 12 USD IRS 1 year -1 2 years 6 3 years 18 5 years 0.78% years 25 US$ Fixed US$ LIBOR US$ Fixed US$ LIBOR Currency (Basis) Swap: USD v AUD A$ LIBOR A$ LIBOR AUD Interest Rate Swap 5-yr A$ Bond AUD IRS Tenor Mid 1 year 3.05% 2 years 3.14% 3 years 3.30% 5 years 3.60% Savill Consulting 7

8 3. AUD bond plus a currency swap: USD cost USD Interest Rate Swap USD/AUD Basis Swap Tenor Treasury Mid Spread Tenor A$ Spread 1 year 0.17% years 0.28% years 0.39% + 12 USD IRS 1 year -1 2 years 6 3 years 18 5 years 0.78% + 12 US$ 0.90% Fixed US$ LIBOR 5 years 25 US$ Fixed US$ LIBOR Currency (Basis) Swap: USD v AUD A$ A$ LIBOR+25 A$ A$ 3.60% Fixed A$ LIBOR AUD Interest Rate Swap 5-yr A$ Bond AUD IRS Tenor Mid 1 year 3.05% 2 years 3.14% 3 years 3.30% 5 years 3.60% Savill Consulting 8

9 3. AUD bond plus a currency swap: USD cost The bank is left with the following net position under the swap. US$ 0.90% A$4.50% A$ 3.85% US$ 0.90% % 5-yr A$ Bond A$4.50% 5-yr A$ Bond A$ 3.85% % A$4.50% US$ 1.50% A$ 4.50% 5-yr A$ Bond Savill Consulting 9

10 A comparison between FX forwards and a currency swap Cash Flows and IRR under a series of spot and forward FX deals Cash Flows and IRR under the currency swap Tenor AUD coupon and principal FX Rate Cash Flow in USD Spot -500,000, ,000,000 6-mo 11,250, , mo 11,250, ,474, mo 11,250, ,322, mo 11,250, ,190, mo 11,250, ,031, mo 11,250, ,872, mo 11,250, ,733, mo 11,250, ,598, mo 11,250, ,465, mo 511,250, ,725,623 IRR% 4.50% 1.78% Tenor AUD coupon and principal FX Rate Cash Flow in USD Spot -500,000, ,000,000 6-mo 11,250,000-3,937, mo 11,250,000-3,937, mo 11,250,000-3,937, mo 11,250,000-3,937, mo 11,250,000-3,937, mo 11,250,000-3,937, mo 11,250,000-3,937, mo 11,250,000-3,937, mo 11,250,000-3,937, mo 511,250, ,937,500 IRR% 4.50% 1.50% Savill Consulting 10

11 Summary: s funding cost in USD 1 USD 1.75% US$ Bond USD Bond Coupon = 1.75%... 2 USD AUD 4.50% AUD AUD bond plus a series of FX forwards USD coupon = 1.78%... A$ Bond 3 USD Fixed AUD 4.50% AUD Fixed AUD bond in combination with a currency swap USD coupon = 1.50%... A$ Bond Savill Consulting 11