Question

Assume that Total SA, a world leading oil and gas company headquartered in in La defense, France,borrows SFr 100,000,000 for ten years commencing January 1, 2015 for its new exploration project. According to the terms of the loan, Total SA pays interest at the end of each year and pays back the principle at the end of ten years. On the borrowing date, the relevant financial information is:

Spot = SFr1.20/€i€ = 5.0%
iSFr = 3.0%

Suppose that on December 31, 2015, the spot rate is SFr1.00/€.

Suppose Total’s Swiss franc assets generate a 5% return on assets in Swiss francs each year for the next year starting from January 1, 2015. Ignoring any tax complications, what isTotal’s net Swiss franc cash flow each year that is exposed to exchange rate changes (includethe negative sign “-” in your answer if the net Swiss franc cash flow is a negative number)?

Your answer: SFr___________________.
(Keep two decimals; Do not include currency symbols in your answer; Do include thenegative sign, “-” in your answer if your answer is a negative number)

Answer 1

Step1

a)We find present value first of the debt which comes 117.06 Million and then interest on that @ of 3% = SFr3.512 Million . Now convert it Euro that is 3.512 / 1.2 = Euro 2.93

Step 2

b)Translation loss = 2.93 - 3.512 = -0.585

Step 3

c) Translation gain when 200 Million assets is given = 82.9

Step 4

d) Net interest = 200 x 5% - 3.512

= 10 - 3.512 = 6.488

This solution is provided with detailed explanation. Please discuss in case of Doubt.

Best of Luck. God Bless

Please Rate Well :)