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.)
Gulf 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:
Where Bfix = Present value of bond with underlying fixed-interest payment
and Bfl = Present value of bond with underlying variable-interest payment
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:
Calculation of Bfl:
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.
![= [0.0565 * (6/12)] * 2,000,000,000.00 = 56,500,000.00](http://blackherald.egoong.com/wp-content/plugins/wpmathpub/phpmathpublisher/img/math_980.5_95131af3c026ef3b0b87c7f3f88f2a1a.png "= [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
Cornell MBA Essay - Please Write the Table of Contents for the Book of Your Life Story (400 Word Limit)
March 20, 2009 | Leave a Comment
“The highest courage is to dare to be yourself in the face of adversity. Choosing right over wrong, ethics over convenience, and truth over popularity…. these are the choices that measure your life. Travel the path of integrity without looking back, for there is never a wrong time to do the right thing.” …..Anonymous.
NOTE: Be creative. Approach this essay in any way you choose; there is no ‘right’ or ‘wrong’ response.
PART I: THE YEARS OF CHILDHOOD
Chapter 1: Conceived in the Heat of Passion and Born in the Ghetto………………..10
Chapter 2: Greater Tomorrow Elementary School, Oak Cliff, South Dallas…….40
Chapter 3: Ain’t Notin’ Good in the Hood……………………………………………….80
Chapter 4: On our Block We Still Pray……………………………………………………109
Chapter 5: The Formative Years ………………………………………………………….130
PART II: HIGHER LEARNING
Chapter 6: Oak Cliff Historically Black Kommunity Kollege, Texas………..170
Chapter 7: Devry University (on 15th & Q Street)………………………..200
Chapter 8: Professional Certifikations……………………………230
Chapter 9: Dropping Out of Kollege…………………………..280
PART III: KORPORATE AMERIKA
Chapter 10: All Animals are Equal, But Some Animals are More Equal than the Others (George Orwell)……300
Chapter 11: Stand Up & Be Counted For Executive Leadership…320
Chapter 12: Difference is both a personal and professional liability………..340
Chapter 13: The Kubicule Narratives of a Negro……380
Chapter 14: Back of the Bus & How To Rig Promotion Interviews - A Step By Step Approach……..400
PART IV: THINKING OUTSIDE THE KUBE
Chapter 15: Invest In Yourself - After All Is Said & Done, All Man Works For Himself…450
Chapter 16: And I just Can’t Wait to be King…..500
Chapter 17: Better to be the Head of a Dog than the Tail of a Lion…….550
PART V: THE THINGS THAT MATTERS MOST
Chapter 18: Indefatigable Optimism……………. 570
Chapter 19: Love is Divine…………………..……600
Chapter 20: Family is Important…………………630
NOTA BENE: This is a draft and designed to help you with your MBA applications. Created under the Creative Commons rule and it is copyleft. Use as a guide for your essays. I plan to collate and refine the essays I have posted on Black Herald and publish a book of MBA essays in the future. If you like this essay, stayed tuned for our essay on Corporate Governance - you are gonna love it 
.
Stanford GSB Admissions Essay - What matters most to you, and why?
December 21, 2008 | Leave a Comment
“Who knows but that, on the lower frequencies, I speak for you? - Ralph Ellison - Invisible Man 1947″
The most important thing to some people is to save a planet in peril and advocate for the over 100 million sharks that will be poached this year by predacious human beings. For others, what matters most is to bring comfort to helpless children living in abject poverty and pauperism in the farthest nooks & crannies of the globe. A lot of people will gladly donate their time and money in order to support the missions of the Armies of Salvation, while others will go to any length to maintain the old order and lie to us that fairness lies in the eyes of the beholder. But you and I know what fairness and justice look like when we see them. Though my interests are eclectic, my self-actualization is to stand up against tyranny and nepotism wherever I see them and tell Africans and African Americans that we can no longer afford to wallow in the shallow waters of mediocrity. That the time is ripe for us to search within and aim for the highest heights in our fields of endeavor.
I want to be like Elizabeth McCartney who left a lucrative job in Washington DC for St. Bernard Parish, Louisiana in order to help the victims of KATRINA find their ways back home. Because she knows that, north, east, south or west, home is still the best. I want to be like Yohannes Gebregorgis, who established Ethiopia Reads, to bring free public libraries & literacy programs to thousands of Ethiopian children because he knows that a mind is a terrible thing to waste and that unless Africa reads, our communities cannot develop the next generation of thinkers, scientists, philosophers, accountants, doctors and astronauts that will help leapfrog the continent to the next developmental frontier. I want to be like Viola Vaughn who built the “10,000 Girls” program in Dakar Senegal to help failing schoolchildren pass their exams or be like Maris Ruiz who crosses the border from El Paso, Texas into Mexico several times a week to bring food, clothing and toys to hundreds of impoverished children and their families.
To achieve my goal, I established Black Herald Online Magazine to serve as a repository for disseminating the stories, struggles and triumphs of men and women of color, so that the new generation can read their stories and say YES! I can do it too. In the last year alone, I published over 100 stories to showcase the accomplishments of black people in commerce, science, fashion & entertainment, banking, politics and education including a story about the “Most Important Blacks in Technology Awards”, a program designed to honor outstanding and accomplished black engineers for their remarkable contributions to the fields of science and technology and another story about the African Banker Awards established to recognize the reforms, rapid modernization, consolidation, integration and expansion of African banking. The time to change the negative cultural narratives in our society is now. Nobody knows our story better than us, consequently, it is incumbent on us to create platforms to broadcast our achievements -if we don’t blow our trumpet, nobody would.
The Stanford Graduate School of Business prides itself as the school of the future where people are equipped with the wherewithal to nurture and develop fledgling businesses into world class enterprises and I look forward to leveraging my Stanford MBA education to develop Black Herald into a household name and continue to positively impact my community one story at a time!!.
NOTA BENE: This is a draft and designed to help you with your MBA applications. Created under the Creative Commons rule and it is copyleft. Use as a guide for your essays. Merry Xmas and Happy New Year in advance. May the new year herald all your unfulfilled dreams, Amen!!
Zenith Bank Plc
October 14, 2007 | Leave a Comment
Introduction: Zenith Bank Plc was founded in 1990 and provides various banking and financial services to the corporate and individual customers in Nigeria. It offers a range of services, including corporate banking; investment banking; retail banking; trade; children’s account; multilateral, conglomerate, and private banking; small business; foreign exchange and trade finance services; private banking; and treasury services. The bank also has subsidiaries that provide insurance, pension custodian, stockbroking and trust services. A highly technological driven bank, Zenith Bank customers enjoy the benefits of e-banking services including but not limited to online bill payment systems, automatated teller machines, mobile banking and western union money transfers. The bank is expanding globally and has branches in Ghana and London. It is one of the five biggest banks in Nigeria.
Financial & Financial Ratios:
| Description/Year | 2007 | 2006 |
|---|---|---|
| Income Statement | $ | $ |
| Turnover | 749,407,114.62 | 474,308,300.40 |
| Profit Before Tax | 202,371,541.50 | 122,529,644.27 |
| Tax | (53,754,940.71) | (30,830,039.53) |
| Profit After Tax | 147,826,086.96 | 91,699,604.74 |
| Minority Interest | 806,324.11 | 7,905.14 |
| PAT After Tax After Minority Interest | 147,035,573.12 | 91,699,604.74 |
| Balance Sheet | ||
| Shareholders Fund | 916,996,047.43 | 743,083,003.95 |
| Total Assets | 7,691,699,604.74 | 4,893,280,632.41 |
| Ratios | ||
| Return on Equity | 15.97% | 12.25% |
| Return on Asset | 1.91% | 1.85% |
NB: All conversions to dollar were done using an exchange rate of 126.50 Nigerian Naira to a Dollar.
Ratings:
| Rating Agency | Rating |
|---|---|
| Augusto & Co. (2003-2007) | Aaa |
| Global Credit Rating | AA+ |
| Fitch Rating 2006 | A+ |
Management Team:
- Jim Ovia - Managing Director/CEO
- Godwin Emefiele - Deputy Managing Director
- Adaora Umeoji - Regional/Group Director Abuja Zone
- Peter Amango - Executive Director
- Apollos Ikpobe - Executive Director
- Elias Igbu-Akenzua - Executive Director
- Pamela Yough - General Manager
- Udon Emmanuel - Executive Director
Subsidiaries:
- Zenith Insurance
- Zenith Pension Custodian
- Zenith Securities
- Zenith Trust Company
- Zenith Bank Ghana
- Zenith Bank UK
- Cyberspace Networks
Please visit www.zenithbank.com for more information about the bank.
Guaranty Trust Bank Plc - Nigeria
September 17, 2007 | 2 Comments
Introduction: Guaranty Trust Bank Plc provides various commercial banking services in Nigeria, Gambia, and Sierra Leone. Its services include retail banking, loans and advances, equipment leasing, corporate finance, money market activities, and allied services, as well as foreign exchange operations. It also offers Internet banking, SMS banking, and financial advisory services, including debtor services, creditor advisory services, and bank advisory services. As of February 28, 2007, Guaranty Trust Bank operated approximately 102 branches in Nigeria, 5 branches in Gambia, and 4 branches in Sierra Leone. In addition, the company, through its subsidiaries, acts as registrars to public companies and offers insurance services. Guaranty Trust Bank was incorporated in 1990 and is headquartered in Lagos, Nigeria. The bank has been featured in the Harvard Business School case study series.
GTBank Highlights:
- One of the largest banks in Nigeria in terms of assets (N486.5bn, equivalent to US$3.79bn), with ROE of 27.88% and Tier 1 capital ratio of 16.64%
- Diversified full service bank with strong focus on blue chip companies
- Business focused predominantly on large corporates and multinational companies in vital economic sectors, notably:
- Oil & Gas, Telecommunications, Manufacturing, Commodities Trading and Service sectors
- Shareholders’funds of N47.3bn (US$368m) and market capitalization of N300.6bn (US$2.34bn). Diversified ownership structure (over 300,000 shareholders with no significant individual shareholder)
- Excellent Trade Finance, Treasury & cash management capabilities
- Strong funding profile (large and stable deposit base) and liquidity
- Strong relationship with, and growing access to foreign currencyfacilities from, multilateral agencies such as IFC, FMO, ADB, EIB
- High quality loan book (focused on high-end corporate market), with one of the lowest NPL to total loans ratio in the Nigerian banking sector
- Rated BB-by S&P and B+ by Fitch. Best rated bank in Nigeria.
Guaranty Trust Bank wants to expand into francophone countries in Africa by acquiring local banks. Managing Director Tayo Aderinokun said “We have ambitions to extend our reach beyond anglophone West Africa”. Aderinokun was speaking on the first day of trade on the London Stock Exchange of Guaranty Trust’s Global Depository Receipts (GDRs), which rose to $11.6 from their launch price of $11.2. The bank raised $750 million through the GDR offer. He was responding to question about what the bank intends to do with the money. “We believe we will most likely go into francophone Africa through acquisitions because it’s a new market and we don’t speak the language and it’s easier that way. It’s in the works,” he said.
Key Management Staff:
- Tayo Aderinokun
-Chief Executive Officer/Managing Director - Segun Agbaje
-Deputy Managing Director - Lara Ogunlaja
-Assistant General Manager
Corporate Finance Group - Lola Odedina
-Assistant General Manager
Head, External Affairs and Communication
To learn more about the bank visit www.gtbplc.com . You can also find more information about the company in the attached adobe pdf file. Guaranty Trust Bank Plc - LSE presentation. 
UBA - United Bank for Africa Plc
September 10, 2007 | 3 Comments
Founded in 1961, UBA is the largest financial services group in West Africa with a balance sheet circa of US$8 billion, over six million customer accounts, 600 branches and 700 ATMS. Formed by the merger of the commercially focused UBA and the retail focused Standard Trust Bank in 2005, the Bank has a clear ambition to be the dominant and leading financial services provider in Africa. It has recently raised more than US$1.2 billion from private and global institutional investors through an equity capital offering.
A major initiative is now underway to achieve its growth ambitions involving acquisitions, restructures, an aggressive plan to build a significant consumer lending business providing credit cards, auto finance, loans and mortgages and resourcing of key technical specialists across the Bank. Outside Africa, it has presence in New York, Ghana and The Cayman Island. The bank is currently rated by Fitch (April 2007) as follows - Short-Term: F1 and Long-Term: A+.
The Bank consists of the following divisions:
- UBA Plc (the Bank) - West Africa’s largest bank and the flagship operation.
- UBA Global Markets Limited - The investment banking arm which is already redefining the Nigerian debt capital markets with a number of landmark transactions (notably a N300B bond issue for the Federal Mortgage Bank of Nigeria aimed at jump starting the Nigerian mortgage market).
- UBA Trustees Limited - Nigeria’s premier trustee company established in 1964.
- UBA Stockbrokers Limited – The secondary market trading arm of the group that deals in equities and other fixed income securities in the capital market.
- UBA Pensions Custodian Limited - One of the licensed pensions fund custodians in Nigeria and is expected to provide a haven for the savings of Nigerian workers.
- UBA Registrars Limited - With over 30 years’ experience in Share Register Administration Services in Nigeria, UBA Registrars emerged from the former Global Markets Limited then engaged in the business of share registration, stock broking and issuing house. It was incorporated in March 2006 as a wholly owned subsidiary of UBA Plc.
- UBA Asset Management - The largest asset management company in Nigeria with over N20Billion in funds under management.
- UBA Private Equity Limited - Provides equity financing for small and medium scale enterprises with over N3B under management.
- UBA Ghana - First Nigerian bank to gain a banking license to operate in this jurisdiction and now operates from 7 branches (balance sheet size is in excess of Cedi 360 Billion).
Chief Executive Officer/Group Managing Director
Mr. Tony O. Elumelu, MFR, holds honours degree at both graduate and post-graduate levels in Economics. Tony obtained additional academic exposures from the prestigious business schools of Harvard, USA and IMD, Lausanne, Switzerland. His banking/financial career spans over two decades and has seen him work in virtually all areas of a bank. He was appointed MD/CEO of then Standard Trust Bank Plc in 1997, a position he held till the successful completion of its merger with United Bank for Africa Plc.
Tony has served in various capacities in the Public Sector at the instance of the Federal Government and her agencies. These include Member, presidential committee of the Heart of Africa [Nigeria Image] project, Member of the Presidential committee on NEPAD, the Advisory Board of the Federal Capital Territory and various other national committees. In the private sector, he is a founding Director of Transnational Corporation Plc, a member of the governing council of the Financial Institutions Training Center of Nigeria, Director of the Central Securities Clearing System Ltd and President of the West African Bankers’ Association (Nigerian chapter). He was accorded the national honour of Member of the Order of the Federal Republic [MFR] in 2003.
In 2006, he was elected as President of the West African Bankers Association(WABA), a position he will hold for 2 years. He won the 2006 African Business Leader of The Year award conferred by the acclaimed uk-based magazine, Africa Investor. In March 2007 he was voted The Banker of The Year by the Nigerian Magazine, Global Excellence.
Executive Directors:
- Faith Tuedor-Mathews
- Suzanne Iroche
- Victor O. Osadolor
- Godwin Ize-Iyamu
- Philips Oduoza
- Chika Mordi
- Ibrahim Jega
For more information about the Bank, its subsidiaries and products, please visit www.ubagroup.com .
