Gaz De France
Essay title: Gaz De France
Gaz De France
1&2)
In my opinion, Mr. Reboul did an excellent job with liability management so far. He and his staff successfully hedged GDF’s foreign debt and in that process were actually able to made profits which contributed to net income. Currency swaps allow companies to exploit the global capital markets more efficiently. They are an integral arbitrage link between the interest rates of different developed countries. Companies have to come up with the funds to deliver the notional at the end of the contract. They are obliged to exchange one currencys notional against the other currencies notional at a fixed rate. The more actual market rates have deviated from this contracted rate, the greater the potential loss or gain. Because currency swaps involve exchange risk on principal, the credit risk associated with these transactions is substantially greater than with interest rate swaps. However, Mr. Reboul engages in swaps directly only with parties with AAA credit rating while for others he chooses to work through financial intermediary and thus put limit on potential loss. Although GDF’s liability management was impressive in the past, continuous appreciation of FF against USD while depreciating against DEM could raise huge problems in the future. More precisely, depreciation of FF can cause rebalancing in European Currency basket which could have a huge negative impact on GDF’s ECU debt. Also, because of their aggressive approach, managing and keeping the record of all swap transactions is becoming really difficult for Mr. Reboul’s staff.
Like FX forwards, three things influence the price and value of a Currency Swap:
Domestic interest rates
Foreign interest rates
The exchange rate.
Although at the initiation the value of a swap is zero to both parties that can change. As per Hull , for the payer of the low-interest currency, swap will generally tend to have a negative value in the future. The opposite is true for the payer of the high-interest currency. Also, if one currency depreciates against the other, that will have a negative impact on the party with a long position in that particular currency.
In my opinion, that is where GDF realized 1B profit in 1985. As per data from the case, USD significantly depreciated against FF from 1985 until first quarter of 1986 (9.9502FF/USD at the beginning of 1985 to 7.2036FF/USD in 1st quarter of 1986),
Remaining life on swap = 5 years
Notional principal = US$100m; FF500m
Swap 8% US$ for 10% FF