International Business College Case Study Example | Topics and Well Written Essays - 1500 words

International Business College - Case Study Example With the help of the current value of the possible future cash flows, the market values for interest and foreign currency exchange risk are found out. However, the information according to the sensitivity analysis will not necessarily signify the real changes in fair value that IBM would face in case of normal market conditions as, due to practical confinements, all variables except for the particular market risk factor are held constant. Coca Cola Company makes the use of derivative financial instruments mostly to lessen their exposure to unfavorable fluctuations in the foreign currency exchange rates and in interest rates and commodity prices involved as market risks. The company does not go into derivative financial instruments in order to carry out trading. In fact, risk by hedging and primary economic exposure is reduced by all their derivative positions. Owing to the high connection between the underlying exposure and hedging instrument, reciprocal changes in the value of the underlying exposure is used to counterbalance fluctuations in the value of the instruments. Practically all of Coca Cola's derivatives are simple, over-the-counter instruments with liquid markets. If the firm has borrowed on a floating rate basis, at very reset date, the rate for the following period would be set in line with the market rate. The firm's future interest payments are therefore uncertain. An increase in rates will adversely affect the cash flows. Consider a firm, which wants to undertake a fixed investment project. Suppose it requires foreign currency financing and is forced to borrow on a floating rate basis. Since its cost of capital is uncertain, an additional element of risk is introduced in project appraisal. On the other hand, consider a firm, which has borrowed on a fixed rate basis to finance a fixed investment project. Subsequently inflation rate in the economy slows down and the market rate of interest declines. The cash flows from the project may decline as a result of the fall in the rate of inflation but the firm is logged into high cost borrowing. 2.1 IBM As compared to an increase of $18 million on December 31, 2005, there would be reduction in the fair market value of IBM's financial instruments of $113 million, which would be a result of a 10% reduction in the levels of interest rates on December 31, 2006, keeping all other variables constant. On the other hand, as compared to a reduction of $8 million at December 31, 2005, there would be a hike in the fair value of IBM's financial instruments of $96 million, which would be a result of a 10% increase in the levels of interest rates, keeping all other variables constant. Alterations in IBM's interest rate profile and amount and debt maturities have

Financial Markets & institutions Assignment Example | Topics and Well Written Essays - 1000 words

Financial Markets & institutions - Assignment Example (LurÊ ¹e 15) Example; 100.00 Euros are provided by a company for a period of one year at rate of 3 per cent. At the end of the year it expects to receive 1030.00 Euros. However, the bank supposes 10 per cent rate inflation in the next year it will want 1133.00 Euros. The interest rate expected by the bank will sum up to 13.3 per cent. Treasury Bill (T-Bill) are simple market securities issued by the government. T-Bills are short-term securities used by the government to collect money from the public. In purchasing of T-Bills, the holder will pay a price that is less than the face or par value of it. (Kawai 16) T-Bills mature after three months, half a year or after a year of issuance. The government will then pay the holder the full face value. T-Bill provides guarantee and safety returns because it has full back and faith of the government. Investors lending money to the government get their money back with interest. Limited access is one of the drawbacks of T-Bills. Investors who need to withdraw their money before the maturity dates are reached have to pay a penalty. T-Bills have little returns because of lees maturity period mostly not more than one-year thus low amount of interest. (Kawai 21) The banks or credit unions issue certificates of deposit (CDs) to holders who have deposited funds to the bank. CDs limit the holders from withdrawing the funds when in need of cash until a set period of time elapses. When one has to withdraw fund from the bank a penalty is incurred. CDs are secured form of investments and they offer high amount of returns. CDs are not prone to risk, pensions and instability. Disadvantages of certificate of Deposits are that they require a high amount of initial capital than that for saving account. Investors obtain little returns from CDs thus a drawback. Companies create corporate bonds by giving debts with the aim of raising capital. Bond provide fixed amount of income and