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Research:
Foreign Currency Loan In Japanese Yen

                                                                                                        The Transaction
  • Client C takes a loan in Japanese Yen. While the current Dollar-Yen rate 124.35 it is proposed that the loan be drawn down at a Dollar-Yen rate of 120, which, at a constant Rupee-Dollar rate of 38.75, works out to 0.3229.
  • The tenor of the loan is 13 months.
  • The client takes on the Rupee-Yen exchange risk and keeps its position uncovered in order to save 17% p.a. on its Rupee cost of funds.

Risks

  • C will be taking on a Rupee-Yen exchange risk. The Break-Even Rupee-Yen rate thus works out to 0.3778 at the end of the period. The possible combinations of Dollar-Rupee and Dollar-Yen which can make up this composite rate are given in sheet "break even" can be seen here. As can be seen, the Danger Points are 117.5 on USD-JPY and 42 on USD-INR.

Hedging

  • It should be clearly understood C will earning 17% as a quid-pro-quo for accepting the Rupee-Yen risk. In fact, the transaction should only be entered into if C does not expect the Rupee to be 17% weaker against the Yen at the end of the loan period. The transaction will prove to be really beneficial if this view actually turns out to be true.
  • In case C sees that the rates (either USDINR or USDJPY or both) are going against its view, it can hedge itself by taking a Forward Contract in the relevant currency. The Forward Contracts will have a cost attached to them, which will erode the benefit of the swap to that extent.
  • The Dollar-Yen risk can be hedged using Currency Options also

Alternative Way of Achieving the same Objective
If C cannot access a straight Yen loan, but has a US-Dollar loan on its books, it can synthetically move to a Yen loan by entering into a Forward Contract to Buy Dollars / Sell Yen. The interest differential of close to 5% between the US Dollar and the Japanese Yen will be to the benefit of C.

Additional Benefit
The transaction is designed to enable C to gain not only the Interest Rate benefit, but also the benefit of Currency depreciation in case the Yen weakens against the Dollar and the Rupee. As mentioned earlier, we place an 80% probability of the Yen weakening to 135 against the Dollar over a 12 month time-frame and place only a 40% chance of the Rupee weakening to 42 against the Dollar by March.

 

Current

Swap / Loan

Rates

proposed

1.00 pm, 19/2/98

at

USDJPY

124.35

120.00

USDINR

38.75

38.75

JPYINR

0.3116

0.3229

17%

0.3646

0.3778

<--- Break Even Rate

US Dollar - Japanese Yen

Dollar-Rupee

110

112.5

115

117.5

120

122.5

125

127.5

130

132.5

135

45.00

0.4091

0.4000

0.3913

0.3830

0.3750

0.3673

0.3600

0.3529

0.3462

0.3396

0.3333

44.00

0.4000

0.3911

0.3826

0.3745

0.3667

0.3592

0.3520

0.3451

0.3385

0.3321

0.3259

43.00

0.3909

0.3822

0.3739

0.3660

0.3583

0.3510

0.3440

0.3373

0.3308

0.3245

0.3185

42.00

0.3818

0.3733

0.3652

0.3574

0.3500

0.3429

0.3360

0.3294

0.3231

0.3170

0.3111

41.00

0.3727

0.3644

0.3565

0.3489

0.3417

0.3347

0.3280

0.3216

0.3154

0.3094

0.3037

40.50

0.3682

0.3600

0.3522

0.3447

0.3375

0.3306

0.3240

0.3176

0.3115

0.3057

0.3000

40.00

0.3636

0.3556

0.3478

0.3404

0.3333

0.3265

0.3200

0.3137

0.3077

0.3019

0.2963

39.50

0.3591

0.3511

0.3435

0.3362

0.3292

0.3224

0.3160

0.3098

0.3038

0.2981

0.2926

39.00

0.3545

0.3467

0.3391

0.3319

0.3250

0.3184

0.3120

0.3059

0.3000

0.2943

0.2889

38.75

0.3523

0.3444

0.3370

0.3298

0.3229

0.3163

0.3100

0.3039

0.2981

0.2925

0.2870

38.50

0.3500

0.3422

0.3348

0.3277

0.3208

0.3143

0.3080

0.3020

0.2962

0.2906

0.2852

38.00

0.3455

0.3378

0.3304

0.3234

0.3167

0.3102

0.3040

0.2980

0.2923

0.2868

0.2815

37.50

0.3409

0.3333

0.3261

0.3191

0.3125

0.3061

0.3000

0.2941

0.2885

0.2830

0.2778

37.00

0.3364

0.3289

0.3217

0.3149

0.3083

0.3020

0.2960

0.2902

0.2846

0.2792

0.2741

Notes:

The cells in Red are the combination of Rupee-Dollar and Dollar-Yen rates at which the transaction goes Out of the Money

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