a) While market-based hedging instruments can be used to offsetor counter uncertainties in interest rates and exchange rates asthey impact the income statement, balance sheet hedges require adifferent approach. Assume you are the CFO of Toyota trying tooffset the balance sheet risks associated with Toyotaâs $4.5billion investment in Georgetown Kentucky. Please explain how thisrisk would be offset by a combination of a 15-year Euro Dollar Bondwith equal repayments in the last five years and a floating rate 10year syndicated Euro-Dollar bank loan combined with an interestrate swap. Assume a fifteen-year straight-line amortization of thenew Georgetown facility.
b) Look at the JAL FX loss scenario in the Additional Text Readingswhere JAL lost as much or more in FX than the $800 million value ofthe planes it was purchasing. Then calculate JALâs cost if it hadused a different type of hedge, borrowing US $ to buy US governmentbonds that it then cashed as each plane was purchased. Generallyone can borrow up to 95% of the value of US government bonds withthe borrowing cost normally about .25% or 25 basis points above theyield on the bonds. Assume that the yield on the bonds is 8% andthat they borrow for the full 10 years noted in the case
a) While market-based hedging instruments can be used to offsetor counter uncertainties in interest rates and exchange rates asthey impact the income statement, balance sheet hedges require adifferent approach. Assume you are the CFO of Toyota trying tooffset the balance sheet risks associated with Toyotaâs $4.5billion investment in Georgetown Kentucky. Please explain how thisrisk would be offset by a combination of a 15-year Euro Dollar Bondwith equal repayments in the last five years and a floating rate 10year syndicated Euro-Dollar bank loan combined with an interestrate swap. Assume a fifteen-year straight-line amortization of thenew Georgetown facility.
b) Look at the JAL FX loss scenario in the Additional Text Readingswhere JAL lost as much or more in FX than the $800 million value ofthe planes it was purchasing. Then calculate JALâs cost if it hadused a different type of hedge, borrowing US $ to buy US governmentbonds that it then cashed as each plane was purchased. Generallyone can borrow up to 95% of the value of US government bonds withthe borrowing cost normally about .25% or 25 basis points above theyield on the bonds. Assume that the yield on the bonds is 8% andthat they borrow for the full 10 years noted in the case
