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:
Period
Revenue
Profit before Interest Swap
Exchange Rate (St)
Predicted Revenue
Trend D
Seasonal Effect on Revenue
Seasonal Effect on Profits 1
2.04
1714.6
1400
280
22.4 2
2.111
1600 -1
-320
-25.6 3
2.103
1800
360
28.8 4
1622.8
1.989
1585.8
2000
-400
-32 5
2.022
2200
440
35.2 6
1941.6
-4.672
2.026
2400
-480
-38.4 7
2.033
2600
520
41.6 8
6.2192
1.899
2800
-560
-44.8 9
1.874
3374.2
3000
600 48 10
1.924
3200
-640
-51.2 11
138.86
1.856
3400
680
54.4 12
4.8368
1.614
3600
-720
-57.6 13
1.663
3800
760
60.8 14
2379.8
30.384
1.671
2409.4
4000
-800
-64 15
1.568
4200
840
67.2 16
1.57
2383.8
4400
-880
-70.4 17
4360.8
1.605
4430.8
4600
920
73.6 18
1.518
4800
-960
-76.8 19
4726.5
218.12
1.586
4759
5000
1000 80 20
2507.7
40.616
1.504
5200
-1040
-83.2 21
1.528
5400
1080
86.4 22
1.497
5600
-1120
-89.6 23
1.463
5800
1160
92.8 24
3176.1
94.088
1.558
3207.8
6000
-1200
-96
Revenue = Trend + Seasonal + ECI Factor + Random
Trend = (200 x Period)
Seasonal = .2 x D x Trend
ECI Factor = .6 x (ER – 2.000) x Trend

3. Swap Schedule Let’s assume YTM= 8% compounded quarterly WTI
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.
Interest Swap pay
Interest Swap Receive
Cash Flows from Swap
Total CF after the Swap
22.4
-22.4
22.848
28.8
-28.8
29.376
-0.8
35.2
-35.2
35.904
31.232
41.6
-41.6
42.432 48
-48
63.812
48.96
54.4
-54.4
84.46
55.488
60.8
-60.8
62.016
92.4
67.2
-67.2
68.544
73.6
-73.6
75.072 80
-80
138.12
81.6
86.4
-86.4
88.128
92.8
-92.8
94.656
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. Rate of Change before Swap Rate of Change after Interest Rate Swap
Volatility
Rate of Change before Swap
Rate of Change after Interest Rate Swap SD
Volatility before Swap
Volatility after Swap
Volatility after Interest Rate Swap and after actual profitability in period 4

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
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. Predicted Revenue assuming Currency Swap We pay in DCU
We receive in ECI and pay in Europe
Swap’s Effect on Profits
Currency and Interest Rate Swap Combined
1680
1428
2856
-2.688
1280
1088
2176
2160
1836
3672
1600
1360
2720
1.056
0.256
2640
2244
4488
1920
1632
3264
3120
2652
5304
2240
1904
3808
3600
3060
6120
18.144
81.956
2560
4352
97.792
4080
3468
6936
2880
2448
4896
4560
3876
7752
3200
5440
63.168
5040
4284
8568
3520
2992
5984
90.816
5520
4692
9384
87.216
202.48
3840
6528
6000
5100
10200
99.36
237.48
4160
3536
7072
6480
5508
11016
4480
7616
6960
5916
11832
4800
8160
316.04

11. 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.

12. We have different alternatives to pay him/ her for the deal:
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