Question # 06: What gives rise to changes in fixed rate currency swap value which would explain the FF 1 billion of swap related gains of GDF between 1983-85?
gaz de france case solution
Answer:
Fixed rate currency swap is the hedging instrument, which reduce the risk that arises due to the fluctuation of the exchange rates. Contracting parties pay fixed rates in the fixed rate currency swap.Gaz de France enters in the fixed rate currency swap agreement to mitigate the risk associated with the varying exchange rates, and foreign currency denominated foreign currency debts. The fluctuating in the exchange rates and company contracts of fixed rate swaps helps the company to generate the $1 billion French Franc in the years 1983 to 1985.
Question # 07: What do you think are reasons behind the concerns being raised by some market participants with regards to Gaz de France’s liability management program using swaps and forwards?
Answer:
Gaz de France is in need of funds, and the economy of the country is not suitable to issue the new debt, therefore Gaz de France is looking forward towards the international market to raise the funds for expansion. As Gaz de France is heavily involved in Unites States market, which issued the commercial papers. Gaz de France issued approximately 3.2 billion of the bonds in the year 1985, the foreign exchange currency risk arises due to the international currency. They use the different hedging instrument that is swaps and forward contracts to mitigate the financial risk due to fluctuation in foreign exchange rates of the country. Foreign exchange risk would be controlled by the Gaz de France through interest rate swap, which benefited them in hedging of the local currency commercial paper and foreign commercial paper issued in Gaz de France currency. Due to the fluctuation in exchange rates, price of the commercial paper will also be secured by the future contracts and forward contract................................
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