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World Tours, Incorporated (WTI) Cash Management Swap FINA 7360 Srilakshmi Bharthwaj

World Tours, Incorporated (WTI) Cash Management Swap FINA 7360 Srilakshmi Bharthwaj Andrey Kolokoltsov Asal Shokati. Keeping the seasonal factor out, we designed the swap:. Revenue = Trend + Seasonal + ECI Factor + Random Trend = 1200 + (200 x Period) Seasonal = .2 x D x Trend

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World Tours, Incorporated (WTI) Cash Management Swap FINA 7360 Srilakshmi Bharthwaj

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  1. World Tours, Incorporated (WTI) Cash Management Swap FINA 7360 Srilakshmi Bharthwaj Andrey Kolokoltsov Asal Shokati

  2. Keeping the seasonal factor out, we designed the swap: Revenue = Trend + Seasonal + ECI Factor + Random Trend = 1200 + (200 x Period) Seasonal = .2 x D x Trend ECI Factor = .6 x (ER – 2.000) x Trend

  3. Let’s assume YTM= 8% compounded quarterly WTI Swap Schedule Payment 99.2 Payment 99.2*(1+0.02) Payment 105.6 Payment 105.6*(1+0.02) Payment 112 Payment 112*(1+0.02) Payment 118.4 Payment 118.4*(1+0.02) Interest Rate Swap Dealer 1Q 1991 2Q 1991 3Q 1991 4Q 1991 1Q 1992 2Q 1992 3Q 1992 4Q 1992

  4. Retroactively applying the swap, keeping the seasonal factor out.

  5. Cash Flows after the Interest Rate Swap in Comparison to the No Hedge Strategy Profits

  6. Volatility

  7. This is an accreting fixed-for-fixed interest rate swap due to the fact that our notional value grows as opposed to having a floating swap leg.

  8. Our exchange rate exposure is 85% of the revenue. This is due to the fact that 15% of WTI’s expenses is in domestic currency. Swap should cover 85% of predicted revenue. ECI/DCU=2 so ECI factor =0.

  9. The both sides of the swap have the same exact value since the swap was originally designed to create an NPV of zero for the total cash flows.

  10. The original design of this fixed-for-fixed interest rate swap allows for the total NPV=0 -> no spread for the dealer. We have different alternatives to pay him/ her for the deal: • Upfront fee • A fixed percentage of the growing notional value • Fee per transaction

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