imt interest swap

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INTERNATIONALFINANCIAL

MANAGEMENT

EUN / RESNICK

Third Edition

Chapter Objective:

This chapter discusses currency and interest rate swaps, which are relatively new instruments for hedging long-term interest rate risk and foreign exchange risk.

Bab ini membahas swap mata uang dan swap tingkat bunga. Swap merupakan instrumen lindung nilai yang relatif baru bagi kepentingan nilai risiko jangka panjang dan risiko valuta asing.

DERIVATIVE :

Currency & Interest Rate Swaps

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Chapter Outline

Types of Swaps Size of the Swap

Market The Swap Bank Interest Rate Swaps Currency Swaps

Jenis Swaps Ukuran Pasar Swap Bank Swap Bank Swap Tingkat Suku

Bunga Swap Mata Uang

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Definitions

In a swap, two counterparties agree to a contractual arrangement wherein they agree to exchange cash flows at periodic intervals.

There are two types of interest rate swaps: Single currency interest rate swap

“Plain vanilla” fixed-for-floating swaps are often just called interest rate swaps.

Cross-Currency interest rate swapThis is often called a currency swap; fixed for fixed rate debt

service in two (or more) currencies.

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Size of the Swap Market

In 2001 the notational principal of:Interest rate swaps was $58,897,000,000.

Currency swaps was $3,942,000,000 The most popular currencies are:

U.S. dollar Japanese yen Euro Swiss franc British pound sterling

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The Swap Bank

A swap bank is a generic term to describe a financial institution that facilitates swaps between counterparties.

The swap bank can serve as either a broker or a dealer. As a broker, the swap bank matches counterparties but

does not assume any of the risks of the swap. As a dealer, the swap bank stands ready to accept either

side of a currency swap, and then later lay off their risk, or match it with a counterparty.

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An Example of an Interest Rate Swap

Consider this example of a “plain vanilla” interest rate swap.

Bank A is a AAA-rated international bank located in the U.K. and wishes to raise $10,000,000 to finance floating-rate Eurodollar loans. Bank A is considering issuing 5-year fixed-rate Eurodollar bonds

at 10 percent. It would make more sense to for the bank to issue floating-rate

notes at LIBOR to finance floating-rate Eurodollar loans.

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An Example of an Interest Rate Swap

Firm B is a BBB-rated U.S. company. It needs $10,000,000 to finance an investment with a five-year economic life. Firm B is considering issuing 5-year fixed-rate

Eurodollar bonds at 11.75 percent. Alternatively, firm B can raise the money by issuing 5-

year floating-rate notes at LIBOR + ½ percent. Firm B would prefer to borrow at a fixed rate.

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An Example of an Interest Rate Swap

The borrowing opportunities of the two firms are:

COMPANY B BANK A

Fixed rate 11.75% 10%

Floating rate LIBOR + .5% LIBOR

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An Example of an Interest Rate Swap

The swap bank makes this offer to Bank A: You pay LIBOR – 1/8 % per year on $10 million for 5 years and we will pay you 10 3/8% on $10 million for 5 years

COMPANY B BANK A

Fixed rate 11.75% 10%

Floating rate LIBOR + .5% LIBOR

Swap

Bank

LIBOR – 1/8%

10 3/8%

Bank

A

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COMPANY B BANK A

Fixed rate 11.75% 10%

Floating rate LIBOR + .5% LIBOR

An Example of an Interest Rate Swap

Here’s what’s in it for Bank A: They can borrow externally at 10% fixed and have a net borrowing position of

-10 3/8 + 10 + (LIBOR – 1/8) =

LIBOR – ½ % which is ½ % better than they can borrow floating without a swap.

10%

½% of $10,000,000 = $50,000. That’s quite a cost savings per year for 5 years.

Swap

Bank

LIBOR – 1/8%

10 3/8%

Bank

A

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An Example of an Interest Rate Swap

Company

B

The swap bank makes this offer to company B: You pay us 10½% per year on $10 million for 5 years and we will pay you LIBOR – ¼ % per year on $10 million for 5 years.

Swap

Bank10 ½%

LIBOR – ¼%

COMPANY B BANK A

Fixed rate 11.75% 10%

Floating rate LIBOR + .5% LIBOR

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COMPANY B BANK A

Fixed rate 11.75% 10%

Floating rate LIBOR + .5% LIBOR

An Example of an Interest Rate Swap

They can borrow externally at

LIBOR + ½ % and have a net

borrowing position of

10½ + (LIBOR + ½ ) - (LIBOR - ¼ ) = 11.25% which is ½% better than they can borrow floating.

LIBOR + ½%

Here’s what’s in it for B: ½ % of $10,000,000 = $50,000 that’s quite a

cost savings per year for 5 years.

Swap

Bank

Company

B

10 ½%

LIBOR – ¼%

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An Example of an Interest Rate Swap

The swap bank makes money too.

¼% of $10 million = $25,000 per year for

5 years.

LIBOR – 1/8 – [LIBOR – ¼ ]= 1/8

10 ½ - 10 3/8 = 1/8

¼

Swap

Bank

Company

B

10 ½%

LIBOR – ¼%LIBOR – 1/8%

10 3/8%

Bank

A

COMPANY B BANK A

Fixed rate 11.75% 10%

Floating rate LIBOR + .5% LIBOR

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An Example of an Interest Rate Swap

Swap

Bank

Company

B

10 ½%

LIBOR – ¼%LIBOR – 1/8%

10 3/8%

Bank

A

B saves ½%A saves ½%

The swap bank makes ¼%

COMPANY B BANK A

Fixed rate 11.75% 10%

Floating rate LIBOR + .5% LIBOR

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An Example of a Currency Swap

Suppose a U.S. MNC wants to finance a £10,000,000 expansion of a British plant.

They could borrow dollars in the U.S. where they are well known and exchange for dollars for pounds. This will give them exchange rate risk: financing a

sterling project with dollars. They could borrow pounds in the international

bond market, but pay a premium since they are not as well known abroad.

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An Example of a Currency Swap

If they can find a British MNC with a mirror-image financing need they may both benefit from a swap.

If the spot exchange rate is S0($/£) = $1.60/£, the U.S. firm needs to find a British firm wanting to finance dollar borrowing in the amount of $16,000,000.

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An Example of a Currency Swap

Consider two firms A and B: firm A is a U.S.–based multinational and firm B is a U.K.–based multinational.

Both firms wish to finance a project in each other’s country of the same size. Their borrowing opportunities are given in the table below.

$ £

Company A 8.0% 11.6%

Company B 10.0% 12.0%

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$9.4%

An Example of a Currency Swap

$ £

Company A 8.0% 11.6%

Company B 10.0% 12.0%

Firm

B

$8% £12%

Swap

Bank

Firm

A

£11%

$8%

£12%

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An Example of a Currency Swap

$8% £12%

$ £

Company A 8.0% 11.6%

Company B 10.0% 12.0%

Firm

B

Swap

Bank

Firm

A

£11%

$8% $9.4%

£12%

A’s net position is to borrow at £11%

A saves £.6%

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An Example of a Currency Swap

$8% £12%

$ £

Company A 8.0% 11.6%

Company B 10.0% 12.0%

Firm

B

Swap

Bank

Firm

A

£11%

$8% $9.4%

£12%

B’s net position is to borrow at $9.4%

B saves $.6%

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An Example of a Currency Swap

$8% £12%

$ £

Company A 8.0% 11.6%

Company B 10.0% 12.0%

Firm

B

The swap bank makes money too:

The swap bank faces exchange rate risk, but maybe they can lay it off (in another swap).

Swap

Bank

Firm

A

£11%

$8% $9.4%

£12%

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The QSD

The Quality Spread Differential represents the potential gains from the swap that can be shared between the counterparties and the swap bank.

There is no reason to presume that the gains will be shared equally.

In the above example, company B is less credit-worthy than bank A, so they probably would have gotten less of the QSD, in order to compensate the swap bank for the default risk.

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A is the more credit-worthy of the two firms.

Comparative Advantage as the Basis for Swaps

$ £

Company A 8.0% 11.6%

Company B 10.0% 12.0%

A has a comparative advantage in borrowing in dollars.

B has a comparative advantage in borrowing in pounds.

A pays 2% less to borrow in dollars than B

A pays .4% less to borrow in pounds than B:

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B has a comparative advantage in borrowing in £.

Comparative Advantage as the Basis for Swaps

$ £

Company A 8.0% 11.6%

Company B 10.0% 12.0%

B pays 2% more to borrow in dollars than A

B pays only .4% more to borrow in pounds than A:

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A has a comparative advantage in borrowing in dollars.B has a comparative advantage in borrowing in pounds.

If they borrow according to their comparative advantage and then swap, there will be gains for both parties.

Comparative Advantage as the Basis for Swaps

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SWAP

Kedua belah pihak sepakat melakukan perjanjin untuk menukar cash flow di masa yang akan datang pada periode yang akan datang.

Bank Swap bertindak sebagai broker atau dealer atau perantara untuk menswap transaksi dua perusahaan

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Tipe Swap

Interest Rate Swap Dua belah pihak sepakat menukar mata uangnya.

Cross Currency Swap Dua belah pihak sepakat menukar dua mata uang yang

berbeda

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Kasus 1

Telkom butuh dana $10.000.000 (Rating AAA). Telkom boleh mengeluarkan obligasi dengan tingkat bunga fixed 10% atau pada tingkat suku bunga mengambang pada level JIBOR (boleh meminjam).

PT PN butuh dana $10.000.000 (Rating BBB). PT PN boleh mengeluarkan obligasi dengan tingkat bunga fixed 11,75% atau pada tingkat suku bunga mengambang pada level JIBOR + ½%.

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Solusi 1

Bank Swap menawarkan Telkom JIBOR – 1/8% dan bank akan membayar Telkom sebesar 10 3/8%.

Bank Swap akan menawarkan PT PN 10 ½% dan bank akan membayar JIBOR – ¼%

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Solusi 1

Peluang meminjam untuk kedua perusahaan adalah sebagai berikut:

PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

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Solusi 1

Bank Swap memberikan penawaran terhadap PT TELKOM, sebagai berikut:PT TELKOM membayar (kepada Bank Swap) LIBOR – 1/8% per tahun selama 5 tahun untuk pinjaman sebesar $10.000.000Bank Swap akan memberikan pinjaman kepada PT TELKOM sebesar 10 3/8% (dari total pinjaman) selama 5 tahun untuk pinjaman sebesar $10.000.000

PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

Swap

Bank

JIBOR – 1/8%

10 3/8%

PT TELKOM

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PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

Solusi 1

PT TELKOM: PT TELKOM dapat meminjam pada tingkat suku bunga tetap sebesar 10% dan memiliki keuntungan pinjaman Swap sebesar:

-10 3/8 + 10 + (JIBOR – 1/8) =

JIBOR – ½ % dimana ½ % lebih baik dibandingkan meminjam dengan tingkat suku bunga mengambang tanpa Swap (JIBOR).

10%

½% of $10,000,000 = $50,000. Angka ini merupakan biaya yang dapat dihemat oleh PT TELKOM setiap tahunnya selama periode 5 tahun.

Swap

Bank

JIBOR – 1/8%

10 3/8%

PT TELKOM

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Solusi 1

PT PN

Bank Swap memberikan penawaran terhadap PT PN: PT PN membayar Bank Swap 10½% setiap tahun untuk pinjaman sebesar $10 million selama 5 years dan Bank Swap akan membayar PT PN JIBOR – ¼ % per tahun untuk pinjaman selama 5 tahun

Swap

Bank10 ½%

JIBOR – ¼%

PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

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PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

Solusi 1

PT PN dapat meminjam pada tingkat suku bunga JIBOR + ½ % dan memiliki net position pinjaman 10½ + (JIBOR + ½ ) - (JIBOR - ¼ ) = 11.25% dimana lebih rendah ½% dibandingkan tingkat suku bunga tetap pinjaman biasa.

LIBOR + ½%

Penawaran Swap untuk PTPN:

½ % dari $10,000,000 = $50,000 , merupakan biaya

yang dapat dihemat per tahun selama periode 5

tahun.

Swap

Bank

PT

PN

10 ½%

JIBOR – ¼%

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Solusi 1

Bank Swap memperoleh keuntungan juga

¼% dari $10.000.000=

$25,000 per tahun untuk periode 5

tahun.

LIBOR – 1/8 – [LIBOR – ¼ ]= 1/8

10 ½ - 10 3/8 = 1/8

¼

Swap

Bank

PT

PN

10 ½%

LIBOR – ¼%LIBOR – 1/8%

10 3/8%

PT TELKOM

PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

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An Example of an Interest Rate Swap

Swap

Bank

PT

PN

10 ½%

JIBOR – ¼%JIBOR – 1/8%

10 3/8%

PT TELKOM

PTPN menghemat ½%PT TELKOM menghemat ½%

Bank Swap memperoleh keuntungan ¼%

PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

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Offsetting Spot Position (Proporsi)

PT TELKOMBorrows (Received) (fx) -10 3/8%

Pays (fx) 10 %

Pay (fl) JIBOR – 1/8 %

Net JIBOR - 1/2%

Untung (JIBOR ) – (JIBOR – ½%) = ½%

Proporsi = ½ / (1/2 + ½ + ¼) = 40%

PT PNBorrows (Received) (fl) - (JIBOR – ¼%)

Pays (fl) JIBOR + 1/2%

Pay (fx) 10 1/2 %

Net 11,25 %

Untung 11,75% - 11,25 % = ½%

Proporsi = ½ / (1/2 + ½ + ¼) = 40%

Bank SwapReceived (fx) 10 1/2% (a)

Pays (fx) 10 3/8% (b)

Received (fl) JIBOR – 1/8% (c)

Pays (fl) JIBOR – 1/4 % (d)

Net (a-b)+(c-d) 1/8% + 1/8%= ¼%

Proporsi = 1/4 / (1/2 + ½ + ¼) = 20%

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Fungsi Bank Swap

Menghitung Spread Mencari keunggulan komparative Membagi proporsi keuntungan Membuat mekanisme Swap Mengecek keuntungan

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Kasus 2

Jika soalnya sama tetapi proporsi yang diinginkan adalah:

PT TELKOM = 20% = 0,25 PT PN = 20% = 0,25 Bank Swap = 60% = 0,75

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Solusi 2: Offsetting Spot Position

PT TELKOMProporsi = 1/4 / (1/4 + 1/4 + 3/4) = 20%

Untung (JIBOR ) – (JIBOR – 1/4%) = 1/4%

Borrows (Received) (fx) - 10 %

Pays (fx) 10 %

Pay (fl) JIBOR – 1/4 %

Net JIBOR - 1/4%

PT PNProporsi = 1/4 / (1/4 + 1/4 + 3/4) = 20%

Untung 11,75% - 11,50 % = 1/4%

Borrows (Received) (fl) - (JIBOR – 1/2%)

Pays (fl) JIBOR + 1/2%

Pay (fx) 10 1/2 %

Net 11,50 %

Bank SwapProporsi = 3/4 / (1/4 + ¼ + ¾ ) = 60%

Received (fx) 10 1/2% (a)

Pays (fx) 10 % (b)

Received (fl) JIBOR – 1/4% (c)

Pays (fl) JIBOR – ½ %(d)

Net (a-b)+(c-d) ½ % + ¼ %= ¾ %

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Solusi 2

Swap

Bank

PT

PN

10 ½%

JIBOR – ½ %JIBOR – 1/4%

10 %

PT TELKOM

PTPN menghemat ¼ % (20%)

PT TELKOM menghemat ¼ % (20%)

Bank Swap memperoleh keuntungan ¾ % (60%)

PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR

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Kasus 3

Jika soalnya sama tetapi proporsi yang diinginkan adalah:

PT TELKOM = 30% = 0,3 PT PN = 30% = 0,3 Bank Swap = 40% = 0,4

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Solusi 2: Offsetting Spot Position

PT TELKOMProporsi = 0,3 / (0,3+ 0,3+ 0,4) = 30%

Untung (JIBOR ) – (JIBOR – 0,3) = 0,3

Borrows (Received) (fx) - 10 %

Pays (fx) 10 %

Pay (fl) JIBOR – 0,3 %

Net JIBOR - 0,3%

PT PNProporsi = 0,3/ (0,3 + 0,3 + 0,4) = 30%

Untung 11,75% - 11,45 % = 0,3

Borrows (Received) (fl) - (JIBOR – 0,45 % )

Pays (fl) JIBOR + 0,5 %

Pay (fx) 10 1/2 %

Net 11,45 %

Bank SwapProporsi = 0,4 / (0,3 + 0,3 + 0,4) = 40%

Received (fx) 10 1/2% (a)

Pays (fx) 10 % (b)

Received (fl) JIBOR – 0,3 (c)

Pays (fl) JIBOR – 0,45(d)Net (a-b)+(c-d) 0,5 % - 0,15 %= 0,35 % atau

dibulatkan 0,4 %

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Solusi 2

Swap

Bank

PT

PN

10 ½%

JIBOR – 0,45 %JIBOR – 0,3%

10 %

PT TELKOM

PTPN menghemat 0,3 % (30%)

PT TELKOM menghemat 0,3 % (30%)

Bank Swap memperoleh keuntungan 0,4 % (40%)

PT PN PT TELKOM

Fixed rate 11.75% 10%

Floating rate JIBOR + .5% JIBOR