Can Africa continue to grow?

August 24, 2010 | Leave a Comment

A panel of regional business leaders discusses its prospects.

Gross corruption, constant wars, and irrational economics long made Africa a poor, troubled continent where natural-resource companies were almost the only multinationals that dared or cared to do business. But in the 1990s, the picture improved. The wars started subsiding. Many governments balanced their budgets and created a better, safer environment for companies, both foreign and domestic. And the African consumer began to stir. Now 80 million households earn at least the equivalent of $5,000 annually, the point where discretionary spending commences—an increase of 80 percent in eight years. Meanwhile, the continent’s GDP has been rising steadily, at around 5 percent a year, for the past decade, reaching $1.6 trillion in 2008. Last year, Africa was one of just two regions (the other was Asia) where GDP rose.

Is all this good news sustainable? At the 2010 Fortune Global Forum, in Cape Town, South Africa, McKinsey Publishing’s Rik Kirkland spoke with Absa’s Maria Ramos, Coca-Cola’s Bill Egbe, and McKinsey’s Norbert Dörr to find the answer.


Story and video culled from McKinsey Quarterly (McKinsey & Company).

Posted by Webmaster | Filed Under Business 

Announcement - African Banker Awards 2010

July 18, 2010 | Leave a Comment

The African Banker Awards 2010,  will take place on the 8th of October in Washington DC.  Bringing together key players engaged in Africa’s banking industry and financial sectors, the African Banker Awards is a landmark annual event, that takes place every year during the IMF/World Bank Annual Meetings.

The African Banker Awards is by invitation only.  Attendance is free but subject to approval. To secure your place at the event, please register by the 15th August.

Organized by African Banker magazine and IC Events, the African Banker Awards is designed to recognize the reforms, rapid modernization, consolidation, integration and expansion of Africa’s banking and financial system. African Banker, the only pan-African magazine dedicated to banking in the continent, organized this event to celebrate excellence and best practices in the flourishing African banking landscape.

Participants of the African Banker Awards will include CEOs and senior representatives from the leading African banks, financial institutions, international investment banks and private equity groups working in Africa. The event will also be attended by executives from intergovernmental organizations as well as African Heads of States, Government Officials and Diplomats from all over the world.

For further information on the Awards, including this year’s categories, please visit www.africanbankerawards.com.

Posted by Webmaster | Filed Under Business 

Adebayo Ogunlesi (Nigerian) Buys Gatwick Airport

March 1, 2010 | 26 Comments

The man set to become the new owner of Gatwick Airport, tells Sky News how he is going to shake-up Britain’s airport business. In an exclusive interview with Jeff Randall, Adebayo Ogunlesi, chairman of Global Infrastructure Partners, said he is going “to make Gatwick a truly first class experience”.

However he cautioned it would take “somewhere between 12 and 18 months” before passengers started noticing a difference at the airport.  GIP agreed a £1.51bn deal with Gatwick’s current operator BAA last week, which represented a “good price”, Mr Ogunlesi said. The fund, which invests in the energy, transport and waste sectors, has already spent over £1bn so far this year, encouraged by falling asset prices. Mr Ogunlesi said the UK’s strong regulatory framework and attractive assets made “Britain a wonderful place to invest”.

“We love Britain,” Mr Ogunlesi added. The sale of Gatwick to GIP, which is subject to approval by the European Union, is due to be completed by the end of the year. The airport is currently run by BAA, which posted a pre-tax loss of over £780m in the first nine months of the year. The airport operator said it lost £225m on Gatwick after being forced to sell the airport by the Competition Commission.

Culled from Sky News.

Posted by Webmaster | Filed Under Business 

FAS 133 for Dummies - Accounting for Equity Swaps (Part II)

January 31, 2010 | 1 Comment

“There are two types of people in this world -  the taker and the taken.  The taker who takes the most is the richest. “ - P. Diddy in the ABC Drama, A Raisin in the Sun.

nasdaq1000NEWENTRY llc entered into a 2 year fixed-rate equity swap as follows:

  • The aim of this exercise is to illustrate how to account for an equity swap designated as a fair value hedge.
  • However, how can you account for something if you don’t really know how it is  valued?
  • There is usually independence between accounting and pricing/valuation (one should at least hope so), however, the accountants should at least understand what is happening under the hood.
  • Notional is 100M USD.
  • Trade date is March 31, 2008.
  • Newentry llc is the fixed-rate receiver.
  • The fixed rate will be calculated based on market information (see below).  This is called “Pricing the Swap”.
  • The swap will have payment dates as follows:  (a) September 30, 2008 (b) March 31, 2009 (c) September 30, 2009 and (d) March 31, 2010.
  • The days to maturity for these payment dates as March 31, 2008 as follows: (a) September 30, 2008 - 183 days (b) March 31, 2009 - 365 days (c) September 30, 2009 and - 548 days(d) March 31, 2010 730 days.
  • The term structure of interest rate (LIBOR) on the payment dates as observed on March 31, 2008 were as follows (a) September 30, 2008 - 4.75% (b) March 31, 2009 - 4.85%  (c) September 30, 2009 - 5.23% and (d) March 31, 2010 - 5.45%.
  • Assume a 30/360 date convention.
  • Ignore dividend and taxation.
  • Also ignore transaction costs.
  • The stock index “NASDAQ 1000″ on March 31, 2008 was 2002.
  • Newentry’s reporting date is June 30, 2008 and the “NASDAQ 1000″index  on that date was 1750.
  • NASDAQ 1000 was 1770 on first payment date September 30, 2008, the first payment date
  • The term structure of interest rate (LIBOR) on the payment dates as observed on June 30 2008 were as follows (a) September 30, 2008 - 4.95% (b) March 31, 2009 - 4.99%  (c) September 30, 2009 - 5.29% and (d) March 31, 2010 - 5.55%.
  • The days to maturity for these payment dates as June 30, 2008 as follows: (a) September 30, 2008 - 92 days (b) March 31, 2009 - 274 days (c) September 30, 2009 and - 457 days(d) March 31, 2010 -  639 days.

Valuation of the Fixed-Rate Equity Swap:

  • Value of the swap at inception is zero as with any other type of swap.  As you move towards maturity this value changes depending on the volatility of the underlying and changes in interest rate.
  • For a fixed rate equity swap.  The “Fixed Rate” on the initiation date should be established - “Pricing the Swap”..

Calculation of Fixed Rate:

First we must determine the discount factors as of March 31, 2008 for 183, 365, 548 and 730 days as follows:

(a)  B (B,183) = 1/ (1+0.0475(183/360)) = 0.9764

(b)  B (B,365) = 1/ (1+0.0485(365/360)) = 0.9531

(c)  B (B,548) = 1/ (1+0.0523(548/360)) = 0.9262

(d)  B (B,730) = 1/ (1+0.0545(730/360)) = 0.9004

Using the formula below: R = 1 - B(0,t + n) / Sum of B(0, t + i)

R = The fixed rate on the swap = (Price of the swap not the value).
B (0, t +n ) = Discount factor on the last payment date.
Sum of B (0, t + i ) = Sum of discount factors for all payment dates.

R = (1 - 0.9764)/(0.9764 + 0.9531 + 0.9262 + 0.9004) = (1 - 0.9764)/(3.7561) = 0.006283.
Thus the fixed payment is $0.006283 per $1 of notional.

Then we must determine the discount factors as of June 30, 2008 for 92, 274, 457 and 639 days as follows:

(a)  B (B,92) = 1/ (1+0.0495(92/360)) = 0.98750

(b)  B (B,274) = 1/ (1+0.0499(274/360)) = 0.9634

(c)  B (B,457) = 1/ (1+0.0529(457/360)) = 0.9370

(d)  B (B,639) = 1/ (1+0.0555(639/360)) = 0.9103

Valuation of the fixed-rate swap on June 30, 2008:

From a fixed-rate receiver perspective:

V = B(j, t + n) - R (sum of B(j,t + 1) - (S (j)/S(0))

V = Value of the swap at a point in time.

B (0, t +n ) = Discount factor on the last payment date.

Sum of B (0, t + i ) = Sum of discount factors for all payment dates.

V = 0.9103 - 0.006283 ( 0.98750 + 0.9634 + 0.9370 + 0.9103 ) - ((1750/2002)) = $0.123100353/$1 notional principal.

ACCOUNTING ENTRIES - June 30, 2008:

FAS 133 states that:
For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

As of June 30, 2008 - Mark to Market Adjustment Resulting from a decline in the “NASDAQ 1000″ is ($1750/2002) -1 * 100M = ($12,587,412.59).

Dr Earnings - Unrealized Holding Gains - $12,587,412.59
Cr - Equity Investments - $12,587,412.59.
(To record the mark-to-market adjustments on the $100M investments in the NASDAQ 1000 as June 30, 2008)

Dr. Swap Asset (0.123100353 * 100M) - $12,310,035.3
Cr - Earnings - Unrealized Gains - - $12,310,035.3.

(To record increase in value of equity swap as of June 30, 2008)

Balance Sheet Presentation as of June 30, 2008:

Equity Investments        $100,000,000.00
Fair Value Adjustments ($12,587,412.59)
Net                                    87, 412,587.41

Swap Assets                   $12,310,035.3

Income Statement as at June 30, 2008:

Unrealized Holding Gain - 12,310,035.3.
Fair Value Adjustments - ($12,587,412.59)
Net loss                                ( $277,377.29)

Note that no payments are due until September 30, 2008 on the equity swap.  However, you should consider accruing and recording the anticipated receivable asset or liability on this date.  See below for calculation of net settlement on the first payment date

Calculation of Net Settlements at Payment periods (Note that payment is not due until September 30, 2008):

Assume that the NASDAQ 1000 index is at 1770 on September 30, 2008:

Payment based on equity index = (1770/2002) - 1 * 100M = ($11,588,411.59)
Note that this is a depreciation.  The fixed rate receiver - Newentry  llc ( who normally pays appreciation in the index) gets the depreciation in addition to the fixed payment.

Fixed payment to be received is 0.006283 * 100,000,000 = $628,300.00

Total payment to be received = $11,588,411.59 + 628,300.00 = $12,216,711.59

Bibliography:

NOTE: Thanks to our partners at Blackinsey & Company for providing the solution.  Blackinsey & Company is a top tier strategy & management consulting outfit based in Washington, DC.  This was created under creative commons and is copyleft.  The interpretations and analysis presented in this article are purely for pedagogical exercise and Black Herald cannot be held responsible for any error of commission or omission.  Thanks for visiting our website.  You are always welcome :) .

If you like this article check out:

FAS 91 for Dummies and stay tuned for the following:

  • FAS 133 for Dummies
  • FAS 91 for Dummies (Sample with Prepayments)
  • FIN 46 for Dummies
  • FAS 115 for Dummies
  • FAS 123(R) For Dummies

Posted by Webmaster | Filed Under Business 

Winners of the African Banker Awards 2009 announced

October 9, 2009 | 1 Comment

bankers2009bLONDON, UNITED KINGDON - October 6, 2009 - Africa’s top bankers, ministers of finance, governors of central banks and industry leaders came together on the 6th of October at the Four Seasons Hotel in Istanbul, Turkey, to recognize the continent’s successes in banking at an unforgettable awards ceremony and gala dinner.

Bankers from Nigeria, Morocco, Kenya, Angola, South Africa, Togo, Ghana, Mali and Chad, representing North, South, East, West and Central Africa, were amongst the nominees of this year’s African Banker Awards making this truly a pan-African gathering of champions.

A total of 14 awards were presented during the ceremony. The African Banker of the Year award went to Tayo Aderinokun, Managing Director/CEO, GTB Nigeria, the African Bank of the Year award went to Ecobank-ETI. The Lifetime Achievement award was presented to a pioneer of African banking, Paul Derreumaux, the President of the Mali-based Group Bank of Africa, whose outstanding achievements in banking have contributed to Africa’s substantial economic transformation. The award for Finance Minister of the Year was handed to Dr. Youssef Boutros-Ghali, Minister of Finance, Egypt and Tito Mboweni, Governor, South African Reserve Bank was named Central Bank Governor of the Year.

Omar Ben Yedder, Publisher of African Banker magazine, commented: “African banking and financial institutions have not come unscathed by the global financial and economical crisis. But as they say luck favours the prepared. Whereas banks and financial institutions of yesteryears in Africa would have previously yielded and vanished in such turmoil, the banks of today with stronger capital bases and stronger regulatory bodies have suffered severe challenges, but on the whole managed to withstand these external shocks. This is undoubtedly through strong leadership, vision and sustained reform undertaken by many of the winners and nominees present here today.”

Anver Versi, Editor of African Banker magazine highlighted the potential of Africa: “When all 53 African countries, with all our cultural heritage, with our natural resources, with our populations and with our genius can act as one and speak with one voice, when, as in Istanbul, we can discover unity in our diversity, then the world will see the rise of a power that could become the greatest of all.” On the continent’s banking landscape he commented: “African banking, over the past five years has not only broken its national and regional shackles, it has also broken international boundaries and has taken its first tentative steps outside the continent.”

This year’s event, organised by African Banker magazine and IC Events in partnership with BusinessinAfrica Events, was supported by the African Development Bank in line with its commitment to build a strong and vibrant African banking industry. Sponsors included Ecobank, Lexmark International, Inc. and Centigon. The Awards were held during the World Bank’s critical global discussions on the state of the world’s financial systems which were held this year in Istanbul, Turkey.

Christian Udechukwu, Managing Director, BusinessinAfrica Events announced that next year’s African Banker Awards will be held in Washington DC, USA, to again coincide with the IMF/World Bank Annual meeting.

African Banker Awards Winners 2009

African Banker of the Year

  • Tayo Aderinokun, CEO, GTB Nigeria

African Bank of the Year

  • Ecobank-ETI

Best Local Bank in Africa

  • NBC, Tanzania

Most Innovative Bank

  • ABSA, South Africa

Socially Responsible Bank of the Year

  • Nedbank, South Africa


Investment Bank of the Year

  • Standard Bank, South Africa


Microfinance Bank of the Year

  • Equity Bank, Kenya

Deal of the Year

  • Nedbank Capital, Bakwena Refinance

Investment Fund/Private Equity Fund of the Year

  • Citadel

Lifetime Achievement Award

  • Paul Derreumaux, President, Group Bank of Africa, Mali

Finance Minister of the Year

  • Dr. Youssef Boutros-Ghali


Central Bank Governor of the Year

  • Tito Mboweni

Best Development Bank in Africa

  • African Development Bank, Tunisia
  • African Export-Import Bank, Egypt

Best Global Bank in Africa

  • Barclays Bank

Editor’s note:
The African Banker Awards recognise and reward individuals, companies and institutions which have excelled in Africa’s banking and financial sector over the last year.
The African Banker Awards are organised by African Banker magazine and IC Events in partnership with BusinessinAfrica Events UK Ltd. The event is supported by the African Development Bank and sponsored by Ecobank, Lexmark International, Inc. and Centigon.

About the organisers:
African Banker is the only pan-African magazine dedicated to banking in the continent. Launched in 2007, African Banker reflects Africa’s rapidly growing finance and banking sectors. African Banker is published in French and in English to cover the 53 African countries. It has become an essential tool of the people and institutions who pull the strings of Africa’s banking and finance industries. In line with its commitment to banking in Africa, African Banker organises the African Banker Awards to reward the people and financial institutions that are making a big impact on improving the banking industry in Africa.

IC Events
Together with its dedicated team of specialists and extensive network of contacts, IC Events tailors innovative events responding to the most pressing issues in Africa and the Middle East. The events are 100% results-driven, bringing together the main stakeholders and partners involved in the topics tackled to achieve concrete action plans. The events represent a platform to inform, engage, explore and develop. IC Events organises Awards to celebrate excellence across a variety of sectors by rewarding the social, financial, business and political leaders who have contributed most to their field. IC Events organises the African Banker Awards to recognise the rapid growth of Africa’s banking and finance sector.

Supported by:
THE AFRICAN DEVELOPMENT BANK GROUP
The African Development Bank (AfDB) is Africa’s premier development finance institution dedicated to combating poverty and improving living conditions across the continent. The AfDB is also engaged in mobilizing resources for the economic and social progress of its Regional Member Countries (RMCs).  The Bank’s mission is to promote economic and social development through loans, equity investments and technical assistance. The AfDB finances projects in infrastructure, agriculture, health, education, public utilities, transport, telecommunications, industry and the private sector.

In Partnership with:

BusinessinAfrica Events UK Ltd
BusinessinAfrica Events is a leading UK based business communication company specialising in live events, public relations, media relations and reputation management for corporate clients, regulatory agencies and governments with a focus on Africa. BiAE provides an interface between Africa and the rest of the world. It offers precise planning, strict budgetary control, excellent logistical preparation, attention to detail, unrivalled regional network of contacts and a top quality database, extensive industry experience, good information flow and the best on-site management.

More information can be found on www.africanbankerawards.com
For more commentary, further information please contact:

Anna Rosenberg
Tel: + 44 (0) 20 7841 3237
Email: a.rosenberg@africasia.com

Posted by Webmaster | Filed Under Business 

FAS 133 - Accounting For Equity Swap

August 21, 2009 | Leave a Comment

“Until lions have their historians, tales of the hunt shall always glorify the hunter” - African Proverb

equity_swap

See FAS 133 for Dummies - Accounting for Equity Swaps Part 2 is now available.

WILDHORSES PENSION FUND holds an equity portfolio of $350,000,000 that mirrors the Dow Jones Industrial Index.   Concerned that interest rate may rise in the near future, causing a reduction in money supply and consequent movement of capital out the equity market (adverse price movement in the equity market), the Chief Risk Officer (CRO) of WILDHORSES PENSION FUND, TFLASH entered into an equity swap to receive LIBOR minus 15 basis point spread.  The following key information are pertinent to the contract.

  • The length of the swap agreement is 6 months.
  • Date Convention is Actual/360 and a six month period is assumed to be 180 days.
  • The swap contract was entered into on January 1, 2008
  • Dividend Yield is 3%.
  • Six month LIBOR is 6% per annum (Constant Rate)
  • Transaction Cost is Zero
  • On June 30th 2008, Dow Jone Index dropped by 8.8%.

VALUATION & CASH FLOW CALCULATION:

  • The buyer of an equity swap pays the appreciation in the value of the index plus any dividend.
  • The seller of an equity swap pays the depreciation in the value of the index plus LIBOR minus spread.
  • The actual valuation of the underlying portfolio is very easy and its just a multiplication of the portfolio value (notional) by (1 - Percentage (%)) drop in the Index.
  • Note that an equity swap is worth zero immediately after each reset date.  However, what if your reporting period is between reset dates. How will you value an equity swap between payment dates ?   Basically, if you pay some interest rate to recieve the equity then the interim value between resets is the difference between the relative equity price and the discounted interest payment. This will be discussed in a future series.  This example assumes that the reporting period coincides with the payment dates.

So on June 30th, 2008 (six months later) our numbers are calculated as follows:

From the perspective of Wildhorses Pension Fund -

INFLOW:
Notional = $350,000,000.00
Depreciation Percentage = 8.8%
LIBOR - Spread = 6% - (15/100)% = 5.85%
Inflow = (Notional * Depreciation) + Notional * LIBOR -Spread * (180/360)  =
($350,000,000 * 0.088) + $350,000,000 *5.85%*(180/360) =
30,800,000.00 + 10,237,500.00 =  $41,037,500.00

OUTFLOW:

Outflow = Notional* Price Appreciation + Notional*Dividends

$350,000,000* 0 + $350,000,000 * 0.03 * (180/360) = $5,250,000.00

NET INFLOW = $41,037,500.00 - $5,250,000.00 = $35,787,500.00

EQUITY PORTFOLIO:
Value as of June 30, 2008 = $350,000,000 * (1-0.088) = $319,200,000.00

Decrease in Fair Value = $350,000,000.00 - $319,200,000.00 = $30,800,000.00

ACCOUNTING:

FAS 133 states that:
For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

*This is a fair value hedge and as you can tell, we are hedging the risk of adverse movement in price of the portfolio.

Day 1:  No accounting entries required just memorandum entries.  Swap value is zero at inception.

This contract has expired or reached maturity after six months hence entries are posted as follows to reflect this transaction on June 30, 2008:

Dr Unrealized Holding Gain/Loss (Income Statement)   $30,800,000.00
Cr Equity Portfolio                                                                            $30,800,00.00

(To record decrease in fair value of equity - mark to market)

Dr Cash  (Net Cash Inflow)   $35,787,500.00
Cr  Income Statement (Swap Pay-Off)    $35,787,500.00

(To record net swap income as of June 30, 2008)

INCOME STATEMENT PRESENTATION:
Unrealized Holding Loss:              ($30,800,000.00)
Swap Payment Received                 $35,787,500.00
Net Income Impact                         $4,987,500.00

BALANCE SHEET:
Equity Portfolio                           $319,200,000.00

Bibliography:

  • Options, Futures and Other Derivatives “Fifth Edition”  John C. Hull 2003
  • Financial Accounting Standard 133 - AICPA
  • Professional Risk Managers Handbook - Financial Instruments & Financial Markets (www.prmia.org)
  • Pricing, Hedging & Trading Financial Instruments - Carol Alexander
  • Quantitative Methods in Finance - Carol Alexander

NOTE: Thanks to our partners at Blackinsey & Company for providing the solution.  Blackinsey & Company is a top tier strategy & management consulting outfit based in Washington, DC.  This was created under creative commons and is copyleft.  The interpretations and analysis presented in this article are purely for pedagogical exercise and Black Herald cannot be held responsible for any error of commission or omission.  Thanks for visiting our website.  You are always welcome .  In the coming series, we will focus on cash flow and foreign currency hedges.  We will also examine other types of derivatives namely forwards, futures, swaption, equity index and other exotic and examine different valuation tools including binomial theorem and Black-Scholes.  Other third-party valuation tools will also be discussed.

If you like this article check out:

  • FAS 91 for Dummies and stay tuned for the following:
  • FAS 133 for Dummies
  • FAS 91 for Dummies (Sample with Prepayments)
  • FIN 46 for Dummies
  • FAS 115 for Dummies
  • FAS 123(R) For Dummies

Posted by Webmaster | Filed Under Business 

FAS 133 for Dummies - Accounting for Cash Flow Hedges

August 2, 2009 | Leave a Comment

“We are limited, not by our abilities, but by our vision.” - Anonymous.

fas133_3GoldPeckers Incorporated is a manufacturer of golden jewelries based in the US of A.  To meet its production needs, GoldPeckers regularly source its raw materials (mostly Gold) from Ashanti Gold in Ghana West Africa.  Because of the increasing popularity of Gold as an alternative source of investment, the CFO of GoldPeckers, TFLASH is worried that the price of gold may shoot through the roof in the coming years.  Consequently, to hedge the anticipated adverse price movement, TFLASH entered into a forward contract as follows:

  • Spot Price of Gold = $954.50/Troy Ounce
  • Gold is measured in Troy Ounce and 1 Troy Ounce is 31.1034768 grams
  • Storage Cost/Troy Ounce is $28.00 (Storage Cost includes Insurance, Security etc)
  • Notional Unit is 10,000,000 ounces.
  • Risk Free rate is 3.88% (Assume that the risk free rate is constant throughout the life of the forward contract)
  • This is a three (3) year forward contract.
  • Use Discrete Compounding (We will solve another example using continous compounding in a future lesson).
  • For the purpose of illustration, assume that the hedge is fully effective in hedging the cashflow variability exposure.
  • Note that hedge accounting is not automatic, however, assume that GoldPeckers is eligible to use hedge accounting.
  • Spot Price of Gold in 1 year is $1,100.33
  • Spot Price of Gold in 2 years is $1,180.97
  • Spot Price of Gold in 3 years is $1,270.00
  • Forward contract was entered into on January 1, 2000

VALUATION & ACCOUNTING:

VALUATION:
To value a forward contract, we are going to use the Cost of Carry Method.

Under the Cost of Carry method:
VALUE OF A FORWARD CONTRACT PRIOR TO MATURITY:

The price of a forward is determined as follows:

F(0,T)  = S + C (0,T) (1+r)^T

The Net Present Value of the Storage Cost is Calculated as follows:

C (0,T) = C (1+r)^(- T)

The Fair Value of the Forward Contract is calculated as follows:

Vt(0,T) = S + C(t,T) - F(0,T)(1+r)^(- T-t)

VALUE OF A FORWARD CONTRACT AT MATURITY:

VT (0,T) = S - F(0,T)

Where:

  • F = Price of the forward
  • S = Spot Price
  • C = Cost of Carry
  • r = Risk Free Rate
  • V = Value of the forward
  • T = Maturity
  • t = A point in time before time T

Value of forward contract at initiation i.e. January 1, 2000:

On day zero (i.e. now) the PV of the cost of carry is calculated as follows:

C(0,3) = 28*1.0388^-1 + 28 * 1.0388^-2 + 28*1.0388^-3 = $77.99

On day zero (i.e. now) the price of the forward contract is calculated as follows:

F(0,3) = (954.50 + 77.90) *1.0388 ^3 = $1,157.29

On day zero, that is now, the value of the forward contract is zero (0).


Value of the forward contract after 1 year i.e. 12/31/2000:

C(1,3) = 28 * 1.0388^-1 + 28 * 1.0388^-2   = $52.90

F(1,3) = (954.50 + 52.90) * 1.0388^2 = $1,087.09

V(1,3) =  (1100.33 +52.90)  -  1,157.29 *1.0388^(-3-1) = $80.78

Value of the forward contract after 2 years i.e. 12/31/2001:

C(2,3) = 28 * (1.0388)^-1    = $26.95

F(2,3) = (954.50 + 26.95 )* 1.0388^1 = $1019.01086

V(2,3) = (1180.97+26.95)   -  1,157.29*1.0388^(-3-2) = $1,207.92 - 1,114.06 = $93.86

Value of the forward contract after 3 years i.e. 12/31/2002:

V(3,3) = $1,270.00 - $1,157.29 = $112.71

ACCOUNTING ENTRIES:

FAS 133 states that for a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

January 1, 2000.

No entry required - just memorandum entry.

December 31, 2000 ( 1 year later)

The value of the forward contract is positive, therefore its a gain or better yet an asset and it is recorded as follows:

Dr.  Forward Contract Asset   (10M ounces * 80.78) = $807,800,000

Cr Unrealized Holding Gain/Loss (Other Comprehensive Income)   $807,800,000

(To record the increase in the fair value of forward contract as of 12/31/2000)

December 31, 2001 ( 2 years later)

Dr.  Forward Contract Asset   (10M ounces * (93.86 - 80.78))** = $130,800,000

Cr Unrealized Holding Gain/Loss (Other Comprehensive Income)   $130,800,000

(To record the increase in the fair value of forward contract as of 12/31/2001)

**Note that you only record the increase in fair value.

December 31, 2002 ( 3 years later)

Dr.  Forward Contract Asset   (10M ounces * (112.71 - 93.86))** = $188,500,000

Cr Unrealized Holding Gain/Loss (Other Comprehensive Income)   $188,500,000

(To record the increase in the fair value of forward contract as of 12/31/2002)

**Note that you only record the increase in fair value.

At 12/31/2002  10m ounces are purchased at $1,270 (Spot Price) for $12,700,000,000

Dr Gold Inventory  $12,700,000,000

Cr  Cash               $12,700,000,000


(To record the actual purchase of inventory - 12/31/2002)

In the same vein, forward contract is settled as follows:

Dr Cash ($1,270.00 - $1,157.29 = $112.71 * 10M)   $1,127,100,000

Cr Forward Contract Asset ($807,800,000+$130,800,000+$188,500,000)                    $1,127,100,000

(To record final settlement of forward contract - 12/31/2002)

NOTA BENE:
Please note that the Unrealized Holding Gain/Loss posted to OCI will not be taken into income until the hedged items affect earnings i.e. the Gold Inventory purchased are converted to finished goods and sold.  This will be illustrated in a future series.

Bibliography:

  • Options, Futures and Other Derivatives “Fifth Edition”  John C. Hull 2003
  • Financial Accounting Standard 133 - AICPA
  • Professional Risk Managers Handbook - Financial Instruments & Financial Markets (www.prmia.org)

NOTE: Thanks to our partners at Blackinsey & Company for providing the solution.  Blackinsey & Company is a top tier strategy & management consulting outfit based in Washington, DC.  This was created under creative commons and is copyleft.  The interpretations and analysis presented in this article are purely for pedagogical exercise and Black Herald cannot be held responsible for any error of commission or omission.  Thanks for visiting our website :) . In the coming series, we will focus on cash flow and foreign currency hedges.  We will also examine other types of derivatives namely forwards, futures, swaption, equity index and other exotic and examine different valuation tools including binomial theorem and Black-Scholes.  Other third-party valuation tools will also be discussed.

If you like this article check out:

FAS 91 for Dummies and stay tuned for the following:

  • FAS 133 for Dummies
  • FAS 91 for Dummies (Sample with Prepayments)
  • FIN 46 for Dummies
  • FAS 115 for Dummies
  • FAS 123(R) For Dummies

Posted by Webmaster | Filed Under Business 

FAS 133 for Dummies: Accounting for Fair Value Hedges (Example 2)

July 22, 2009 | 4 Comments

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” Aristotle (382-322 B.C.)

fas_133_2a1Gulf of Guinea (GoG) LLC is planning to build a new theme park for $2,000,000,000.00.  In order to finance this project, GoG issued $2,000,000,000.00 for 1.5 years on January 1, 2000 and agreed to pay LIBOR plus 10bp.  This bond was bought in its entirety by BHIB.  Worried that interest rate may rise in the future, thus reducing the fair value of the bond bought from GoG, BHIB entered into an interest rate swap agreement as follows:

  • BHIB to pay LIBOR plus 10bp for 1.5 years.
  • Receive fixed at 6.0% for 1.5 years
  • The LIBOR rates with continuous compounding for 6-months and 12-months maturities (i) 5.55% and (ii) 5.8%
  • There are no transaction costs
  • Interest rate is paid semi-annually and continuously compounded
  • The 6-month LIBOR rate at the last payment date was 5.25% (semi-annual compounding).
  • BHIB fiscal year end is June 30th

The value of the interest rate swap on January 1, 2000 is zero.  Value of a swap at inception is zero.  This is because if the value is not zero, there is an opportunity for arbitrage and based on the efficient market hypothesis, arbitrageurs will quickly take advantage of that opportunity and reset the price back to zero almost instantaneously (real time). No entries are required except memorandum entries.

VALUATION:

Value of the swap as of June 30th, 2000 is calculated as follows:

Vswap = Bfl - Bfix

Where Bfix = Present value of bond with underlying fixed-interest payment
and  Bfl  = Present value of bond with underlying variable-interest payment

  Bfix  =  Sigma Ke^( -riti ) + Le^( -rntn )

Where
K = Fixed payment made on each payment date
L = Notional principal in swap agreement
ti = time until maturity (over the life of the swap)
ri = LIBOR zero rate corresponding to maturity ti
e = exponential

Calculation of Bfix:

K = 2,000,000,000.00 * (6.0/2)  = 60,000,000.00

Bfix = 60e^(-0.0555*6/12) + 2,060e^(-0.058*12/12)

Bfix = 58.357889656956966 + 1943.9188917198049 = 2002.2767813793745

Calculation of Bfl:

10bp = 10/100 of 1%  = 0.001

0.001 + 0.0525 = 0.0535

K = 0.0535 * (6/12) * 2,000 = 53.5

Bfl = 53.5e^(-0.0555*6/12)  + 2000e^(-0.0555*6/12)

= 52.035784944119961 + 1945.2629885652322 = 1997.2987735093521

Vswap = 1997.2987735093521 - 2002.2767813793745 = 4.9780078703879

NB: Note that continuous compounding method is theoretical construct and not really used in practice.  Discrete compounding is more common because it accounts for day count convention etc.

Since BHIB is the fixed-rate receiver and floating rate payer under this swap agreement, BHIB has a gain of $4.9780078703879.  This will result in booking a swap asset for $4.9780078703879 in BHIB books.  In addition, net interest gain/loss will result from the swap agreement as follows:

Fixed Rate interest receivable = $60,000,000.00

Variable Rate + 10 basis point = $53,500,000.00

Net Interest Income from swap = $6,500,000.00

Gulf of Guinea LLC will pay interest on the $2,000,000,000.00 loan @ LIBOR plus 10 basis point.

0.001 + 0.0555 = 0.0565

= [0.0565 * (6/12)] * 2,000,000,000.00 = 56,500,000.00

ACCOUNTING ENTRIES:

FAS 133 states that:
For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

Day 1 when loan was lent to GoG by BHIB:

Dr Bond                    $2,000,000,000.00
Cr       Cash                               $2,000,000,000.00

(To record bond for  $2,000,000,000 - January 1, 2000)

Day 1 when SWAP contract was entered.

(No entries required because this is just a memorandum entry).

Accounting Entries:

Dr Cash                     $6,500,000.00
Cr Income - Swap Interest Received          $6,500,000.00

(To record NET SWAP  Interest  Received)

Dr  Interest Income                      $56,500,000.00
Cr Income -  Bond                                                           $56,500,000.00

(To record  Interest Income Received on original bond acquired for $2,000,000,000.00 for 6 months)

Dr Swap Asset                                           $4,978,007.87
Cr Unrealized holding gain/loss - income           $4,978,007.87

(To record increase in FV of Swap Asset)

Change in FV of Loan = $2,000,000,000 - $1,997,298,773.51 = $2,701,226.49

Dr Unrealized holding gain/loss - income         $2,701,226.49
Cr Bond                                                                            $2,701,226.49

(To record decrease in FV of loan)

NET SWAP INTEREST INCOME:

Net Interest Income                $6,500,000.00

LOAN INTEREST INCOME :

Accrued Interest Income          $56,500,000.00

NET UNREALIZED HOLDING GAINS/LOSSES:

Increase in FV of swap asset     $4,978,007.87
Decrease in Bond FV                 ($2,701,226.49)
Net Unrealized holding Gain      $2,276,781.38

BALANCE SHEET PRESENTATION:
ASSETS:

Swap Assets:                                                               $4,978,007.87
Bond (Variable)                                                     $1,997,298,773.51
NET SWAP Interest Income Receivable                   $6,500,000.00
Interest Income - Cash                                                  $56,500,000.00

**Recalculate the FV of swap and bond every reporting period and repeat these entries.

Bibliography:

  • Options, Futures and Other Derivatives “Fifth Edition”  John C. Hull 2003
  • Financial Accounting Standard 133 - AICPA
  • Professional Risk Managers Handbook - Financial Instruments & Financial Markets (www.prmia.org)

NOTE: Thanks to our partners at Blackinsey & Company for providing the solution.  Blackinsey & Company is a top tier strategy & management consulting outfit based in Washington, DC.  This was created under creative commons and is copyleft.  The interpretations and analysis presented in this article are purely for pedagogical exercise and Black Herald cannot be held responsible for any error of commission or omission.  Thanks for visiting our website.  You are always welcome .  In the coming series, we will focus on cash flow and foreign currency hedges.  We will also examine other types of derivatives namely forwards, futures, swaption, equity index and other exotic and examine different valuation tools including binomial theorem and Black-Scholes.  Other third-party valuation tools will also be discussed.

If you like this article check out:

FAS 91 for Dummies and stay tuned for the following:

  • FAS 133 for Dummies
  • FAS 91 for Dummies (Sample with Prepayments)
  • FIN 46 for Dummies
  • FAS 115 for Dummies
  • FAS 123(R) For Dummies

Posted by Webmaster | Filed Under Business, Featured 

FAS 133 for Dummies: Accounting for Fair Value Hedges

July 13, 2009 | 1 Comment

“Imagination is more important than knowledge. For while knowledge defines all we currently know and understand, imagination points to all we might yet discover and create.” - Albert Einstein.

fass1332Black Herald International Bank (BHIB) bought a $200M 24 months 7% Fixed-Rate bond on  January 1, 2000.   The Chief Financial Officer of  Black Herald, TFLASH, is concerned that interest rate may rise in the near future, thus decreasing the fair value of the bond purchased (inverse relationship between interest rate and bond price).  Specifically, the Federal Government plans to increase interest rates in the future in order to pursue tighter monetary policies.   In order to hedge this risk, TFLASH entered into an interest rate swap to pay fixed and receive variable benchmarked against the LIBOR as follows:

  • Pay fixed @ 7% per annum compounded semi-annually on a swap with a notional of $200M.
  • Assume that as at the reporting period ended March 31, 2000, the remaining payments dates are in 3, 9, 15, 21 months.
  • The swap has a life of 24 months.
  • The LIBOR rates with continuous compounding for 3-month, 9-month, 15-month and 21-month maturities are 9.1%, 10.2%, 11.3% and 12.4% respectively.
  • The 6-month LIBOR rate at the last payment date was 8.0% (semi-annual compounding).

VALUATION:

The value of an interest rate swap is calculated as follows:

Vswap = Bfl - Bfix

Where Bfix = Present value of bond with underlying fixed-interest payment
and  Bfl  = Present value of bond with underlying variable-interest payment

  Bfix  =  Sigma Ke^( -riti ) + Le^( -rntn )

Where
K = Fixed payment made on each payment date
L = Notional principal in swap agreement
ti = time until maturity (over the life of the swap)
ri = LIBOR zero rate corresponding to maturity ti
e = exponential

Bfl = Sigma (L + K)e^( -riti) *

* According to John C. Hull in the fifth edition of Options, Futures and Other Derivatives,  the value of a floating rate bond is just the value before the next payment date discounted at ri for time ti because  Bfl will equal L immediately after interest payment dates.  Also note that swap payments are made in arrears.

Therefore, assuming June 30th, 2000 is an interest payment date, the value of the fixed rate paying bond will be (this is the present value of future cashflow stream of the bond from the date of calculation):

K = 200 * (7 /2 )= $7

Bfix = 7e^(-0.091*3/12) + 7e^(-0.102*9/12) +   7e^(-0.113*15/12)  +   207e^(-0.124*21/12)

Bfix = 6.84254781 +6.4844704+6.077905516+166.6205036 =$186,025,427.3

Bfl = 8e^(-0.091*3/12)  + 200e^(-0.091*3/12)

Bfl = 7.820054639 + 195.501366 = $203,321,420.6

Hence, the value of the swap to party paying fixed and receiving variable:

Vswap = Bfl - Bfix = $203,321,420.6 - $186,025,427.3 = $17,295,993.34

ACCOUNTING ENTRIES:

FAS 133 states that:
For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.

Day 1 when bond was bought:

Dr Bonds                  $200,000,0000.00
Cr       Cash                        $200,000,0000.00

(To record cash payment on acquisition of bond for $200,000,000)

Day 1 when SWAP contract was entered.

(No entries required because this is just a memorandum entry).

As at the reporting date, March 31, 2000, no interest is due but this needs to be accrued in the books for reporting purposes:

Calculation:

Fixed Interest Payable = 200M * 7% * (3/12) = $3,500,000

Variable Interest Receivable = 200M * 8% * (3/12) = $4,000,000

Difference = $4,000,000 - $3,500,000 = $500,000 gain to income

Accounting Entries:

Dr Accrued Interest Income                      $500,000.00
Cr Income                                                               $500,000.00

(To record NET SWAP  Interest  Receivable)

Dr Accrued Interest Income                      $3,500,000.00
Cr Income                                                           $3,500,000.00

(To record Bond Interest Income Receivable- accrued on original bond acquired @7% for $200M)

Dr Swap Asset                                           $17,295,993.34
Cr Unrealized holding gain/loss - income           $17,295,993.34

(To record increase in FV of Swap Asset)

Change in FV of Bond = $200,000,000 - $186,025,427.3 = $13,974,572.7

Dr Unrealized holding gain/loss - income         $13,974,572.7
Cr Bonds                                                                            $13,974,572.7

(To record decrease in FV of Bond)

INCOME STATEMENT PRESENTATION:

NET SWAP INTEREST INCOME:

Net Interest Income                $500,000.00

NET BOND INTEREST INCOME RECEIVABLE:

Accrued Interest Income          $3,500,000.00

NET UNREALIZED HOLDING GAINS/LOSSES:

Increase in FV of swap asset     $17,295,993.34
Decrease in Bond FV                 $13,974,572.70
Net Unrealized holding Gain      $3,321,420.64

BALANCE SHEET PRESENTATION:
ASSETS:

Swap Assets:                                                             $17,295,993.34
Bonds (7% Fixed 24 months)                                     $186,025,427.30
NET SWAP Interest Income Receivable                    $500,000.00 ($4M - $3.5M)
Bond Interest Income Receivable                              $3,500,000.00 (accrued on original bond acquired for $200M at 7% fixed after 3 months).

EQUITY SECTION:

Net Unrealized holding gain/loss        $3,321,420.64

**Recalculate the FV of swap and bond every reporting period and repeat these entries.

Bibliography:

  • Options, Futures and Other Derivatives “Fifth Edition”  John C. Hull 2003
  • Financial Accounting Standard 133 - AICPA
  • Professional Risk Managers Handbook - Financial Instruments & Financial Markets (www.prmia.org)

NOTE: Thanks to our partners at Blackinsey & Company for providing the solution.  Blackinsey & Company is a top tier strategy & management consulting outfit based in Washington, DC.  This was created under creative commons and is copyleft.  The interpretations and analysis presented in this article are purely for pedagogical exercise and Black Herald cannot be held responsible for any error of commission or omission.  Thanks for visiting our website.  You are always welcome :) .

If you like this article check out:

FAS 91 for Dummies and stay tuned for the following:

  • FAS 133 for Dummies
  • FAS 91 for Dummies (Sample with Prepayments)
  • FIN 46 for Dummies
  • FAS 115 for Dummies
  • FAS 123(R) For Dummies

Posted by Webmaster | Filed Under Business 

Mohammed Al Amoudi is the richest black man in the world in 2009.

March 12, 2009 | 13 Comments

richest_black_pple_09bWASHINGTON DC, MARCH 2009 - If the recently released Forbes Magazine list of richest people in 2009 is anything to go by, then Mohammed Al Amoudi (Ethiopian & Saudi Arabian) -  is the richest black man in the world with a networth of $9B - though sometimes considered an Arab, as far as race is concerned, he is a black man see picture above (Yemeni father and Ethiopian mother).  Oprah Winfrey, 55, American television icon is the richest black woman (2nd richest black person) with a networth of  $2.7B.   Aliko Dangote, 51 (Nigerian) is the third richest black man with a networth of $2.5B.  The fourth richest man is Mo Ibrahim (Sudanese-born, now UK Citizen) with a networth of $2B.  The fifth richest black person is  Patrice Motsepe, 47, (South African)  with a networth of $1.3B slightly ahead of Femi Otedola, 42 (Nigerian) with a networth of $1.2B.  To read more about these billionaires, click on their names for a direct link to Forbes Magazine.

Posted by Webmaster | Filed Under Business, Leadership 

Next Page »