Question

A company based in the US has two subsidiaries, one in the UK (GBP) and the other in Egypt (EGP). These subsidiaries would like to receive a nominal 0.5% (annual) rate on their surplus balances. The US HQ can borrow at a rate of 7.0625% and assume a 7-day investment/borrowing timeframe.

Use all the available funds as shown below and assume 365-day basis for all calculations. Assume that each of the foreign subs will expect to end up with the same amount of funds as if invested locally. Any USD not used for funding can be invested at 0.5% over the period.

		Bid	Ask
Spot Rate	GBP/USD	1.5189	1.5195
Forward (7 Day)	GBP/USD	1.5191	1.5198
		Bid	Ask
Spot Rate	EGP/USD	0.7348	0.7351
Forward (7 Day)	EGP/USD	0.7351	0.7355

Balance:

USD = 1,500,000 (Deficit = need for funds) Rate = 7.0625%

GBP = 750,000 (Surplus = available funds) Rate = 0.50%

EGP = 500,000 (Surplus = available funds)

Determine if the US HQ should set swaps for the funding, or just borrow locally. Show calculations in details.

Answer 1

The US HQ is in need for funds. So it can borrow @ 7.0625 %,

However it can also swap GBP and E1GP

First strategy- Borrow locally

Outflow after 7 days if the US HQ borrows locally = 1,500,000 * 7.0625% * 7/365 + 1,500,000

=1,502,031.77

Second strategy - Swap

Borrowing GBP 750,000

USD purchased = 750000 * 1.5189 = 1,139,175

Borrowing EGP 500,000

USD purchased = 500000 * 0.7348 = 367400

Total USD = 1139175 + 367400 = 1506575

USD not used is invested = 6575 * 0.5% * 7/365 = 0.63 USD

Payment to be made in GBP = 750000 + 750000 * 0.5% * 7/365

= 750071

Payment to be made in EGP = 500000 + 500000 * 0.5% * 7/365

= 500048

Payment in USD = 750071 * 1.5198 + 500048 * 0.7355

= $1,507,743

Hence the US Hq should borrow locally.