TCAS case

Questions to consider:
1. FX forecast.
2. Financial needs of TCAS
3. Real mark-up on te !id" #as te use of spot rate te
correct approac"
$. Alternati%es for te ed&e" #ic one"
'ssues (it te FX rate
#a)s of forecastin& FX rate* &i%en te data in te case:
1. +,- data
2. 'R-
3. ---
$. .o%ernment policies
/se of te +,- data
Te +,- data is pro%ided in e0i!it 3. 'mportant factors to
!e e0amined:
1. .1- &ro(t
2. 'nflation
3. .o%ernment deficit
$. .ross sa%in&s
2. 'n%estments
3. Current account
4. Capital account
5. ST67T interest rates
Relationsip !et(een .1- and FX rate
Te &reater te 8real8 &ro(t rate* te &reater te potential
for income &ro(t* i&er interest rates 9real:* and i&er
income and in%estments.
All tese sould lead to an appreciation in te !ase
currenc)
Relationsip !et(een Remainin& factors and FX rate
'nflation and FX rate---;e&ati%e
.o%ernment deficit---;e&ati%e
Sa%in&s----ositi%e to neutral
'n%estments----ositi%e
ST67T interest rate 9real:---positi%e
1etails on 8settlement8 and FX rate
8Settlement8 is te difference !et(een te Current and
Capital account. Te relationsip !et(een te t(o is
almost perfectl) ne&ati%e.
Te FX forecastin& from +,- e0amines te Settlement
issue. Tere are tree possi!ilities for tis account:
1. <ero 9no pressure:--S=1
2. 7ess tan >ero 9ne&ati%e pressure: S?1
3. .reater tan >ero 9positi%e pressure:S@1
'n te latter t(o cases te outcome is far from certain.
For e0ample* if 8less tan >ero8* use of FX reser%es and or
inter%ention usin& trade policies.
-ossi!le scenarios from com!ination of +,- elements
1. Settlement less tan >ero* countr) inflation is i&er
tan oterAsB domestic real rates lo(er tan te partnerAsB
currenc) sould depreciate
2. Settlement is in deficitB inflation lo(erB real rates lo(erB
FX rate sould depreciate
3. Settlement positi%eB 'nflation lo(erB Real rates i&erB
Stron& appreciation
$. Settlement positi%eB inflation i&erB Real rates i&erA
Appreciation.
Te !id
Cark-up = 2D
/ses Spot rate to &et te !id price
1ED collection in Ca)* rest in Au&ust
;o factor for can&es in FX rate (as included
'ncluded in te !id (as de%elopment e0pense of F3EEG
Quantitati%e Anal)sis
For(ard contract
CF2.3C61.3323 = F1.H11C
Forei&n currenc) loan
CF loan amount: CF2.3C691I9.122E6$:: = CF2.23C
7ess arran&ement fee: CF E.E3122C
;et 7oan CF2.23-E.EE3122 = 2.224C
Con%ert into F:
CF2.2246CF1.32H$ = F1.52HC
,pportunit) cost of F de!t: F1.52HJ91I9.116$:: = F1.H1EC
#rite a call on CF at strike of FE.42 9CF eKui%alent of 1.3H:
-remium recei%ed: E.E323JCF2.3C = FH2H13
+est case anal)sis
CF2.3CJ9E.42IE.E323: = F1.H42C
+reak-e%en rate (it te for(ard rate
9161.3323: - E.E323 = FE.3H3H
+u) a -ut on CF- Strike price of FE.42
-remium paid = E.E222J2.3C = F25422
#orst case:
CF2.3CJ9E.42 - E.EE22: = F1.52C
+reak-e%en (it for(ard rate = 9161.3323: IE.EE22 = E.422
Conclusions tus far
'f e0pect te spot rate to ? E.422* !u) a put
'f !et(een E.3H3H and E.4233* (rite a call
'f less tan E.3H4* sell for(ard
Futures contract
CF2.3C J E.432 - 13EE = F1.H14C
-re-sale of contract
7oan amount: CF2.3C691I9E.EH26$:: - CF2.22CJE.EE2 =
CF2.235C
Translate into F: CF2.235C61.32H$J91I9.116$:: =
F1.H15C
Tunnel for(ard
+est case: 2.3CJE.4233 = F1.H33C
#orst case:2.3CJE.4133 = F1.531C
Summar) of Ad%anta&es61isad%anta&es
A1 1isad%anta&e
For(ard Certanint) 7ocked
Las) e0ecution Credit facilit)
+ud&etin&B-lannin&
CC ed&e As a!o%e 7ocked
1ocuments
Futures For(ard not allo(ed ;ot tailored
Adm cost
+asis risk
,ptions Fle0i!ilit)
/nlimited &ains -remium
Ran&e-Tunnel
For(ard 7o( cost option 7imited
upside
Year Current Capital Settlement Expected results Expected
1990 -20.7 23.2 2.5 Appreciate
1991 -23.6 22.1 -1.5 Depreciate
1992 -21. 16.! -.6 Depreciate
1993 -22.3 22.9 0.6 "eutral
199 -16.3 12.3 - Depreciate
1995 0
#arit$
C%ndi
!9 90 91 92 93 9
&' rate 1.1! 1.167 1.15 1.21 1.29 1.366
(n)lati%n
Canada .! 5.6 1.5 1.! 0.2
*.S. 5. .2 3 3 2.6
Di))erence -0.6 1. -1.5 -1.2 -2.
### 1.1773 1.1! 1.13 1.19 1.26
(nterest rate
Canada 0.13 0.09 0.67 0.05 0.5
*.S. 0.075 0.05 0.03 0.03 0.02
Di)) 0.055 0.0 0.6 0.02 0.9!
(&E 1.26 1.21 1.1! 1.23 1.305
+eal rates
Canada 0.0!2 0.03 0.05 0.03 0.052
*.S. 0.021 0.01 0 0 0.016
Di)) 0.061 0.02 0.05 0.03 0.036
(&E 1.117 1.1 1.1 1.17 1.26
+ati% anal$sis
Current 0.67
,uic- 0.62
Cl./0 0.7
S/ de1t.0/ 1.31
D.E 1.06
A2era3e c%llecti%n !5
4id anal$sis
4id C%mp%nents "ature
Desi3n S%)t c%st
5aterials 6ard c%st
0a1%r 6ard c%st
S7ippin3 6ard c%st
Direct 82er7ead 6ard c%st
(ndirect 82er7ead S%)t c%st