Currency Rate Swap between IBM and World Bank

Code : INB0007

Year :

Industry : Investment Banking, Financial Services

Region : US

Teaching Note:Available

Structured Assignment :Not Available

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The International Business Machines Corporation (IBM) IBM is one of the oldest Information Technology (IT) companies with worldwide operations. Some of the segments in which IBM has major operations are Global Technology Services (GTS), Global Business Services (GBS), Software, Systems and Technology, and Global Financing.

The financial Dilemma During the late 1970s, IBM issued bonds in Swiss Franc (CHF) and German Mark (DEM), whose maturity date was March 30, 1986. The issue amounts of 6(3/16)% CHF bonds and 10% DEM bonds were CHF 200 million and DEM 300 million respectively. The interest payment date of the bonds was March 30 of each year. In the early 1980s, the US dollar (USD) had appreciated considerably against most European currencies. This appreciation brought an opportunity for US-based IBM to enjoy capital gains on foreign exchange transactions between USD and European currencies. For example, on August 1, 1980, one DEM was available for 0.5574 USD. It had fallen to 0.4061 USD for each DEM by the end of August 1, 1981 (Refer to Exhibit I for see the movement of USD to DEM). As a result, the USD cost of interest payment of DEM 100 had fallen from $55.74 to $40.61...

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