University of Asia and the Pacific

Seminar on Derivatives

Case 1

Forward Rate Agreement

Consider the spot curve (based on PHIREF and LIBOR) information in the table below. What is FR(6x12)?

Month / 0 / 6 / 12
PHIREF / 6.70% / 7.04%
LIBOR / 5.13% / 5.05%

Case 2

Forward Exchange Rate

You expect USD 100,000 export receipt six months from now. To hedge against the risk of the PhP appreciating against the USD, you enter into a FX Forward Sell agreement whereby you will sell USD 100,000 one month from now at an agreed exchange rate of, say, PhP 50.25 / USD versus today’s (spot) exchange rate of PhP 50.00 / USD. Peso and USD interest are as follows.

Month / 0 / 6
PHIREF / 6.70%
LIBOR / 5.13%
  1. Is PhP 50.25 / USD a fair forward exchange rate?
  1. If 3 months after you entered the FX Forward Sell agreement, the spot exchange rate moves to PhP 50.50 / USD, have you gained or lost from the FX Forward Sell agreement? By how much? Peso and USD interest are as follows.

Month / 0 / 3
PHIREF / 6.60%
LIBOR / 5.03%

Case 3A

PhP Debt vs USD Debt + CCS

XYZ Corp., a Philippine company, requires Peso debt funding. XYZ receives a Peso Term Loan proposal and a USD Term Loan proposal. XYZ may enter into a Cross-Currency Interest Rate Swap proposal (see attached term sheets). Should XYZ go for the Peso Term Loan, or the USD Term Loan and the Cross-Currency Interest Rate Swap?

Assume the following spot curves based on PHIREF (Pesos) and LIBOR (USD).

Month / 0 / 6 / 12 / 18 / 24
PHIREF / 6.70% / 7.04% / 7.14% / 7.21%
LIBOR / 5.13% / 5.05% / 5.00% / 4.87%

Spot exchange rate: PhP 50 / USD

Note on Vanilla IRS vs Cross-Currency IRS.

In a vanilla IRS, the (2) counterparties lend each other an equal amount in the same currency, and bullet principal payment at maturity. As such, there is no cashflow relating to principal payments at contract date and at maturity date. One party (A), say, pays floating interest rates. The other party (B), say, pays a fixed interest rate. At each interest payment period, NET interest payments are paid by one party to the other.

In a cross-currency IRS, one party (A) lends another party (B) in one currency, say Pesos. Simultaneously, B lends A in another currency, say USD. The amount lent by A to B, and the amount lent by B to A, are equivalent at the (spot) exchange rate at contract date. Since the amounts lent by the counterparties are in different currencies, there is no netting of principal amounts at contract date and at maturity date. There is also no netting of interest payments at each interest payment date. In this discussion, B pays A Peso interest at each interest payment date while A pays B USD interest at each interest payment date. At maturity, principal amounts are repaid by each party to the counterparty.

Funding Proposals

Peso Term Loan Proposal

Borrower / XYZ Corp.
Facility Amount / PhP 50.0 Mn
Repayment / Bullet on maturity date
Facility tenure / Two (2) years
Interest Period / A period of 6 months commencing from the disbursement date
Interest Payment Date / Last day of the Interest Period.
Pricing / 6-month PHIREF + 50 bps
Fees / No establishment fees.

Prepayment Option

/ No penalty fee

USD Term Loan Proposal

Borrower / XYZ Corp.
Facility Amount / USD 1.0 Mn
Repayment / Bullet on maturity date.
Facility tenure / Two (2) years
Interest Period / A period of 6 months commencing from the disbursement date.
Interest Payment Date / Last day of the Interest Period.
Pricing / 6-month LIBOR + 25 bps
Fees / No establishment fees.
Prepayment Option / No penalty fee

Cross Currency Interest Rate Swap Proposal

Transaction / USD/PHP Cross currency Swap (Floating Libor vs. Floating PHIREF)
Trade Date / Two (2) Business Days prior to Effective Date
Effective Dates / xxxx
Tenor / Two (2) Years
USD Principal Amount / USD 1.0 Mn to be confirmed on the date of loan signing
PHP Equivalent Principal Amount / To be based on the USD/PHP Spot Reference Rate on the Trade Date
USD/PHP Spot Reference Rate / TBD on Trade Date
PHP Floating Interest Rate Payer / XYZ Corp. (Party A)
PHP Floating Interest Rate Payment Dates / xxxx and yyyy of each year commencing on xxxx (semiannual payments)
PHP Floating Interest Rate / 6-month PHIREF + 25 bps, fixed (1) Business Day prior to the start of the relevant calculation period
Day Count / Actual/360
USD Floating Interest Rate Payer / AB Commercial Bank (Party B)
USD Floating Interest Rate Payment Date / xxxx and yyyy of each year commencing on xxxx (semiannual payments)
USD Floating Interest Rate / 6-month LIBOR + 50 bps, fixed (2) Business Days prior to start of the relevant Calculation Period.
Initial Principal Exchange / On Effective Date:
·  Party A will pay USD Principal Amount
·  Party B will pay PHP Equivalent Principal Amount
Final Principal Exchange / On Termination Date:
·  Party A will pay PHP Equivalent Principal Amount
·  Party B will pay USD Principal Amount
Business Days / New York, Singapore and Makati City, Metro Manila for payment. London for USD LIBOR.
Calculation Agent / Party B
Documentation / ISDA, English Law


Case 3B

PhP Debt vs USD Debt + CCS

Same as Case 3A, except for the following.

1.  PhP term loan pricing: 6-month PHIREF + 25bps

2.  USD term loan pricing: 6-month LIBOR + 12.5bps

3.  CCS: pay floater: 6-month PHIREF + 40bps

Receive floater: 6-month LIBOR + 25 bps

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