EFSE Annual Meeting 2012Tbilisi, June 01
Technical Workshop
Local Currency Finance – How to scale it up?
Hosted by the Currency Exchange Fund (TCX)
Agenda
09.00 Introduction
09.15 Case Studies
10.00 Pricing
11.00 Coffee break
11.30 Local Currency Quiz
12.00 Q&A
12.30 Close
EFSE and TCX - partners in local currency
• TCX– currency hedging for longer tenors in frontier markets
– quotes 15 currencies in SEE and Caucasus
– Largest exposures in AMD, AZN and GEL
– more than half in the microfinance sector
• EFSE and TCX– EFSE is one of TCX’s most active shareholders
– EFSE offers LCY funding in its focus countries with hedging support from market parties and TCX
– EFSE may support (guarantee) direct hedging with TCX
TCX Team
Joost Zuidberg: CEO
Brice Ropion: COO
Diederik van Leur: BO
Martje Troost-Graffelman: BO
Leon Meppelink: BO
Bert van Lier: Trading
Andrej Sorochan: Trading
Othmane Boukrami: Trading
Damian Rozo Munoz: Trading
Harald Hirschhofer: Research
Jos Kramer: Research
Bill Piccolo: Operations
Ilona Eichler: Office Manager
Per van Swaay: Structuring
Jerome Pirouz: Structuring
Philip Buyskes: Structuring
Jorge Gomes: Structuring
Intro Question (1)35
You are working for :
1 – an Microfinance Institution
2 – a Bank
3 – a Central Bank
4 – A DFI (Development Finance Institution) or a MIV
5 - Other
You are working for :
1 – an Microfinance Institutions
2 – a Bank
3 – a Central Bank
4 – A DFI or a MIV
5 - Other
9%
26%
17%
37%
11%
Theme 1 - expensive 35
In my view local currency (LCY) financing is too expensive when
compared to hard currency (HCY) financing:
1 - True
2 – Not sure
3 – False, it depends on several factors and risk
Theme 2 - complexity35
The legal and technical complexities of LCY hedging/funding
are too great for the beneift it provides
1 - Yes
2 – No
Original Sin
“A situation in which a borrower cannot borrow in his
local currency abroad, or even long term domestically”
Eichengreen & Haussman -1999
Original Sin may result in:32
1 - currency mismatches
2 - maturities mismatches
3 – none if EFSE is involved
4 - all of the above
1 - currency mismatches
2 - maturities mismatches
3 – none if EFSE is involved
4 - all of the above
63%
6%
0%
31%
Original Sin
Borrower requires
• Local Currency
• Long Term
Short Term XLocal Currency
Domestic
markets
Result: Maturity mismatch
Hard Currency
X
Foreign markets
Long Term
Result: Currency mismatch
Local Currency
Currency Match
Capital market development
LCY bond issues
Foreign guarantees for longer
tenor funding from local banks
Building longer deposit base
Local Back-To-Back facility
Commercial swap dealers
TCX Fund
The European Systemic Risk Board (ESRB)
• 2008 financial crisis
• Focus on systemic risk in the EU
• 2011 recommendations on lending in foreign currency
“In response to excessive foreign currency lending in several Member States”
Systemic risks identified
• Exchange rate risk and interest rate risk
• Funding risks as local banks rely on parent and
wholesale markets instead of deposits
• FCY lending may fuel excessive credit growth
and asset bubbles
• Concentration and spill-over effects
• Monetary policy impairment
ESRB Recommendations
A. Risk awareness of borrowers
– Require FI’s to provide adequate information
– Require Fis to offer LCY for the same purpose
B. Creditworthiness of borrowers
– Monitor and limit HCY lending levels
– Allow HCY loans only to borrowers that can
withstand FX and interest shocks
– Stringent debt-service to income and LTV ratios
ESRB Recommendations
C. Credit Growth induced by HCY lending
– Monitor excessive credit growth and adopt more stringent measures if the case
D. Internal risk management
– FI to better incorporate foreign currency lending risk (internal risk pricing and capital allocation)
E. Capital requirement:
– Fis to hold capital for HCY lending (non lineair rrelationship between market and credit risk)
ESRB Recommendations
F. Liquidity and funding
– Monitor these risks taken by FIs in HCY lending
with focus on FX and IR mismatches, over-reliance
on off-shore swap markets, concentration of
funding sources
– Limit exposures
G. Reciprocity of regulation
– Home and host states to use same standards
A borrower should fund itself in his local
currency, instead of USD/EUR
32
1 - If the cost of local currency is similar to that of USD funding
2 - to the extent that his revenue and assets are in local currency
3 - to the extent he has local currency expenses
4 - If the currency concerned is very volatile
1 - If the cost of local currency borrowing is similar to that of the alternative USD
funding
2 - If and to the extent that his revenue and assets are in local currency
3 - If its net profit margin is positive after factoring in the cost of the swap
4 - If the currency concerned is very volatile and has been devaluated in the past
6%
69%
6%
19%
Case Study 1
• In Macedonia
• A tier-1 bank
• Requires 3-year funding
• To lend to SME’s at the Bank’s deposit rates
What funding structures would you consider?
What benchmark should you select?
TCX
offshore
Macedonia
Case 1 -Disbursement of the Loan
Loan denominated in MKD, but disbursement in EUR
Floating rate: 28-Day CB Bill + 71 bps + EFSE credit margin
FX Spot Market for
EUR/MKD
Euribor 6-m
28-Day CB Bill + 71bp
Interest at 28-Day CB Bill + 71bp + EFSE margin
Settled in EUR using Central Bank reference ex. rate
Case 1 - Interest Payment
TCX
offshore
Macedonia
FX Spot Market for
EUR/MKD
Euribor 6-m
28-Day CB Bill + 71bp
Case 1 - Principal Repayment
TCX
offshore
Macedonia
FX Spot Market for
EUR/MKD
EUR principal
MKD principal
MKD principal repaid in year 3
Settled in Euro’s using Central Bank reference ex. rate
Case 1 - “synthetic” vs “domestic”
• Synthetic– LCY but HCY settlement
– “non-deliverable”
• Alternative “domestic” LCY loan– LCY loan and settlements in LCY -> “deliverable”
– Supported by TCX (currently in 14 countries)
– Subject to commercial demand & legal framework
– Currently not in Caucasus
• Key benefits to borrower– No liquidity/settlement risk -> borne by TCX
– Convenience factor
Case 1 - “Synthetic” vs “domestic”
Risk type Synthetic
Loan
Domestic
Loan
Market Risk TCX TCX
Credit Risk Lender Lender
Hedge / Loan Match Risk Lender None
Liquidity Risk Borrower TCX
Convertibility Risk Lender Lender
Settlement Risk Borrower TCX
Case 1 - swap result and credit risk
Disbursement Repayment
Exchange rate 1:10 1:12 1:8
Borrower receives/repays in LCY 100 100 100
Lender disburses / receives in USD 10 8,3 12,5
Lender receives from TCX 1,7 -
Lender pays to TCX - 2,5
Net result Lender 10 10
Net result Borrower 100 100
Net result TCX -1,7 2,5
1. Swap fixes USD value of Lender’s assets and income 2. Swap fixes LCY value of Borrower’s obligation 3. TCX may owe or be owed money under the swap
Case 1 - ISDA / CSA
• Standard derivative documentation
• ATE, netting and collataral provisions
• Collateral subject to credit quality
– Independent Amount as a % of notional
– Thresholds
– Minimum Transfer Amounts
• TCX has concluded ISDA with EFSE and all other active shareholders
Case Study 2
• A top tier MFI in Kyrgyz
• With LCY and USD funding from multiple
sources, TCX and non-TCX shareholders
• Facing shortage of domestic hedging sources
• Must close open FX positions
Lender
(non-TCX
Investor)
Bai Tushum
(borrower)
offshore
Kyrgyz Republic
Disbursement of the Loan
USD loan disbursed in USD
Swap mechanics
TCX pays
USD 10% fixed
BT pays
KGS 6-m T-Bills + 12% BT pays USD 10% fixed
as per the agreement
TCX Lender
TCX swap terms: KGS 6m T-Bill + 12% vs USD 10% fixed
ALL PERCENTAGES
ARE FICTITIOUS AND
FOR THE EXAMPLE
ONLY !!
Direct hedging and collateral
• TCX and counterparty both run credit risk
• TCX is “in the money” if the LCY appreciates and if LCY interest rates go down
• TCX must mitigate this risk; options:
– Standard ISDA/ CSA terms
– Investor / Lender guarantee -> EFSE support !
– Credit Support Fund ?
– Daily valuation to minimize collataral upfront ?
MFI
(borrower)
offshore
onshore
Cash collateral exchange
TCX
(hedger)
An EFSE guarantee to cover TCX credit risk…
.....may reduce the need for
cash collateral (completely)
Cash collateral as MtM moves
Rolling Forwards
Borrowers concerns with
swaps
• Benchmark selection
• Interest rate volatility
• Unwind costs
• The high level of the fixed
rate alternative
Solution? Rolling Forward product
• Rolling 6m FX Forwards
• Option to request
conversion to USD If
benchmark exceeds an
agreed threshold
• TCX commits to price
forwards for duration of
the deal
Unwind costs
• If a loan is prepaid/refinanced, this will trigger
unwind costs under the hedge
• This can include several components:
– The MtM caused by FX movements
– The MtM caused by interest rate movements
– A flat fee to cover cost
Unwind costs – an Example
• In June 2012
– Lender provides a 3 year bullet GEL 1m at 12%
– Lender hedges with TCX: GEL 12% vs EUR 7%
– EUR:GEL is 1:2.0 and 3 year fixed rate is 12%
• In June 2013
– EUR:GEL is 1:2.2 and 3 year fixed rate is 14%
– For lender, the FX component of MtM is
– For lender, the interest component MtM is
Borrower TCX Lender
GEL 12%GEL 12%
EUR 7%
positive
positive
Unwind costs – an Example
• In June 2012
– Lender provides a 3 year bullet GEL 1m at 12%
– Lender hedges with TCX: GEL 12% vs EUR 7%
– EUR:GEL is 1:2.0 and 3 year fixed rate is 12%
• In June 2013
– EUR:GEL is 1:1.9 and 3 year fixed rate is 10%
– For Lender, the FX component of MtM is
– For Lender, the interest component MtM is
Borrower TCX Lender
GEL 12%GEL 12%
EUR 7%
negative
negative
Unwind costs
• The FX component of MtM is off-set by an opposite movement in the USD value of the loan
• The interest component of MtM is not off-set by an opposite movement in the value of the loan
• Lender and borrower negotiate who bears which unwind costs under which circumstances
A swap
Advantages
• Single trade, low administration burden
• Any premium is fixed for whole tenor
• Client has clarity in the price for determining on-lending rates
• Does not encourage speculative behaviour
• Easy to cover complicated cash flows
Disadvantages
• Less flexibility for the borrower to exit the swap as the borrower may be liable for unwind costs
• Fixed premium
• Longer collateral exposure
Rolling forward product
Advantages
• Minimises potential
unwinding costs if borrower
wants to prepay or convert
• Does not lock-in a long term
premium
• Minimises collateral
exposure
Disadvantages
• No pricing certainty
• Less pricing transparency
• Swap premiums may move
against the borrower
• Heavier administration
burden for the lender
An MFI is offered a 3 year USD loan of USD Libor + 6% and a
Manat loan, his local currency, at a rate of 6m T-Bill + 7%. The
current 6m T-Bill rate is 3%. The Manat loan:
29
1 - Is 3% more expensive than the USD loan
2 - is cheaper because of lower operational cost in Manat
3 - has a higher nominal interest rate but does not necessarily
present a higher economic cost
1 - Is 12% more expensive than the USD loan
2 - is cheaper because of lower operational cost in Manat
3 - has a higher nominal interest rate but does not necessarily
present a higher economic cost
14%
0%
86%
You can ask EFSE
(who will interact with TCX) to : 28
1 - Quote floating rates provided there is a benchmark
2 - Quote fixed rates in most markets
3 - Start quoting a new currency on request
4 - All above are true
1 - Quote floating rates provided there is a benchmark
2 - Quote fixed rates in most markets
3 - Start quoting a new currency on request
4 - All above are true
29%
11%
11%
50%
Pricing – Fundamental Principles
� TCX provides hedging services to its shareholders
and their clients
� No profit transfer from shareholders to TCX
� We operate on a marginal profit basis (1-2% IRR)
� Market based pricing / derived from market drivers
� Premium/discounts to correct distortions
� Market maker (FPAS, tenor extension, liquidity)
� Verification by Independent Pricing Committee
TCX pricing categories
� Developed Markets
– TCX uses offshore screen-rates. Additionality principle needs to be
proven. (UAH, KZT, TRY)
� Undeveloped offshore markets, but a functioning benchmark and
onshore curve
– TCX uses the onshore curve plus or minus a spread approved by the
Pricing Committee (ALL, HRK, RSD, GEL, AMD, AZN)
� Unavailability of offshore and onshore curve, but a functioning
benchmark could be selected
– TCX prices floating rates only, based on the approved benchmark plus
or minus a spread (MKD, MDL)
� No suitable onshore and/or offshore reference:
– TCX prices fixed rate only up to 4-5 years based on macro-economical
models on selected countries (BYR)
TCX pricing rules
� Benchmark selection must be
– liquid
– independent, without any political interference
– market driven (reflect macro economic conditions)
– legally definable and observable on a daily basis
– expected to exist for the term of the transaction
� TCX adjusts to correct market distortions (plus/minus a spread)
� Floating rate using approved benchmark: no maximum tenor
� Fixed rate/Forwards: 1,5x longer than longest market point
Pricing the Swap : Key Market Variables
The three key variables
for pricing of the swap are :
1. The Foreign Exchange Rate (ex. USD/GEL)
2. The local currency yield curve (ex. GEL T-Bond curve)
3. The hard currency yield curve (ex. USD Libor curve)
Swap Rate (%)
HCY Curve
FxRate
LCY Curve
Swap calculation example and interpretation
An MFI:
– borrowed funds in USD at Libor + 3.5% for 5 years
– wishes to transform that USD liability into a local currency
liability
– without amending the terms of the initial loan agreement
GEL fixed rate X% vs. 6m Libor + 3.5%
Indicative pricing
Step one: Construct the GEL curve
1- CDs and T-bonds from National Bank of Georgia
CD market T-Bond Market
Source : National Bank Source : Bloomberg
The GEL yield curve (ex. GEL T-Bond curve)Step one cont: Construct the GEL curve adjusted with
the risk premium (NDF spread). For GEL risk premium
is zero currently.
-
0.2000
0.4000
0.6000
0.8000
1.0000
1.2000
Ax
is T
itle
Discount Factors
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
Ax
is T
itle
Spot Rates
The USD yield curve (ex. USD Libor curve)
Step two: Contruct the USD Curve. Libor up to 6m and swap rates
thereafter
Grid Point rate
1M 0.24%
2M 0.35%
3M 0.47%
6M 0.74%
9M 0.91%
12M 1.07%
2 year 0.66%
3 year 0.75%
4 year 0.91%
5 year 1.10%
6 year 1.29%
7 year 1.46%
8 year 1.62%
9 year 1.75%
10 year 1.86%
12 year 2.06%
15 year 2.26%
20 year 2.41%
The Foreign Exchange Rate (ex. USD/GEL)
Step three: Discount all future USD flows with the USD curve and solve
for the GEL rate to have zero present value
Pricing of the Swap : Concept
NPV of LCY leg
-
NPV of USD leg
0
GEL example. Results interpretation.
An MFI:
1. borrowed funds in USD at Libor + 3.5% for 5 years
2. wishes to transform that USD liability into a local currency liability
3. without amending the terms of the initial loan agreement
TCX quotes : 5-yr GEL 14% Fixed vs. Libor 6-m + 3.5%
Meaning that:
– the MFI and TCX will enter into a 5 year swap
– the MFI will pay 14% fixed in GEL p/a to TCX and
– the MFI will receive USD Libor 6m + 3.5% p/a from TCX
GEL example. Price interpretation.
Client pays Libor + 3.5% to DFI under loan agreement (-)
Client receives Libor +3,5% from TCX under the swap (+)
Client pays 14% Fixed GEL to TCX under the swap (-)
----------------------------------------------------------------------------------
= Client pays 14% Fixed GEL to TCX under the swap (-)
The swap helped the client to transform a USD loan into a
GEL loan
Pricing of the Swap : Concept
When you enter into the swap on the day of the trade
• You pay GEL 14% fixed to TCX
• You receive Libor 6-m +3.5% from TCX
For the swap to be a fairly priced on the day of the trade the value (NPV) of
the LCY leg paid to TCX must be equal to the value of the USD leg received
from TCX.
The premium paid on the GEL is the X of the equation that makes :
NPV {5-yr GEL X% Fixed} – NPV {5-yr Libor 6-m + 3.5%} = 0
or
NPV {5-yr GEL X% Fixed} = NPV {5-yr Libor 6-m + 3.5%}
NPV of LCY leg
-
NPV of USD leg
Central and Eastern Europe & the Caucasus
Country ISO Benchmark Basis
Swap
max
tenor
Fixed rate
max tenor
5 year floating vs.
USD Libor
3 year fixed
vs. USD Libor
Latest
6m
yield
Armenia AMD 6m T-Bill none 15 years 6m T-Bill +50 bps 13.85% 8.31%
Azerbajian AZN 6m T-Bill none 4,5 years 6m T-Bill+68 bps 4.89% 2.95%
Georgia GEL 6m CD none 15 years 6m CD+44 bps 8.48% 6.72%
Albania ALL 6m T-bill none 3 years 6m T-bill+ 30 bps 8.92% 6.30%
Croatia HRK1 6m ZIBOR none 15 years 6m ZIBOR flat 5.63% 4.10%
Moldova MDL 6m CHIMID none 1.5 years 6m Chimid+45 bps NA – 1.5Y fix max 7.57%
Serbia RSD 1 6m Belibor none 3 years 6m Belibor-63 bps 14.55% 11.01%
Ukraine UAH NA – only fixed NA 7.5 years NA 15% NA
1 Priced vs. Euribor 6m flat
All indications exclusive of lender credit margins
LCY Lender credit margin
The credit margin on a local currency loan should be equal or lower
than a credit margin on a straight USD Loan (adverse to market
practice!)..
The expected exposure of a local currency loan is less than the USD loan
exposure. To ensure constant risk / return the LCY margin (save for other
reasons to reduce) be at exactly the same level as the USD margin
� Reduced currency mismatches reduces default risk
� Currency risk and political risk are generally to some degree correlated,
implying that a currency hedge offers protection against political risk.
Local currency risk margins can be reduced relative to USD margins when
hedged with a A- rated entity.
• Compared to the USD alternative ?
• Nominal rates are high
• Inflation and depreciation effects
• Consider real interest rates
• Compared to local currency alternatives ?
• What are local banks borrowing and lending at?
• Relative to the bond curve ?
Too Expensive?
Pricing Considerations
Consider nominal vs real interest rates. Interest differential
reflects inflation and depreciation expectation
-10,00%
-5,00%
0,00%
5,00%
10,00%
15,00%
20,00%
Inlfation (2011) Real rate
ALL AMD AZNGEL HRK MDL
RSD
UAH
Forward vs. Swap
� Minimum amount for a swap is USD 1m and USD 0.5m for a forward)
� There is no arbitrage between the price of a forward and the price of a
fixed rate swap altough visually it might not seem to be the case.
Example: GEL
• 3 year Swap:
• 8.30% GEL fixed (act/365) vs. 6m USD Libor Flat (act/360)
• 14% GEL fixed (act/365) vs. 6m USD Libor + 5% (act/360)
• 14% GEL fixed (act/365) vs. USD 5,75% USD fixed
• 3 year FX Forward
• Spot: 1.6250
• Forward: 2.0181
Forward Calcs Cont
• Forward (3 years), number of days 1095
• Spot: 1.6250
• Forward: 2.0181
(1 + GEL rate) ^ (number days) / 365)
• Forward = Spot *
(1 + USD rate) ^ (number days) / 360)
If you wish to achieve a USD rate of 5,75%, then
(1 + GEL rate) ^ ((number days) / 365) = Forward * (1 + USD rate) ^ (num
ber days) / 360) / Spot
(1 + GEL rate) ^ (1095 / 365) = 2.0181 * (1 + 5,75%) ^ (1095) / 360)
/ 1.6250
(1 + GEL rate) ^ (1095 / 365) = 1,4724
GEL rate = 13.8%, is 13.8% more expensive than 14% on the swap?
TCX webpage
a) TCX benchmarks and maturities:
https://www.tcxfund.com/countries-benchmarks
b) TCX Model based pricing:
FPAS Countries:
Central Europe & Asia: Belarus, Tajikistan, Uzbekistan & Mongolia
East Asia: Cambodia
Africa: Kenya, DR Congo, Ethiopia, Nigeria, Tanzania, Uganda & Rwanda
Central America & Caribbean: Guatemala & Haiti
https://www.tcxfund.com/macroeconomic-country-forecasts
A Georgian bank lends to its clients in Lari at fixed rates.
A Lender offers the choice between :
- USD floating loan at Libor + 6%
- Lari loan T-bill + 7% or a fixed rate loan at 22%.
You
0
1 – take the GEL floating because currency risk is worse
than interest rate risk
2 - take the USD loan
3 - take the fixed rate in Lari or request a 6-m rolling forward product
4 - enquire whether TCX can offer you floating rates with caps
1 – you take the floating GEL
2 - take the USD loan
3 - take the fixed rate in Lari or a 6-m rolling forward product
4 - enquire whether TCX can offer you floating rates with caps
0%
0%
0%
0%
When the borrower considers LCY
he should take into consideration that 11
1 - High inflation erodes your LCY debt (so consider the currency
where you have the lower real rate)
2 - He has potentially more stable earning
3 - He gets a better credit profile
4 - He can access funding more easily and potentially at a lower cost
5 - He is protected against adverse currency moves
6 - All of above
1 - High inflation erodes your LCY debt (so consider the currency
where you have the lower real rate)
2 - He has potentially more stable earning
3 - He gets a better credit profile
4 - He can access funding more easily and potentially at a lower cost
5 - He is protected against adverse currency moves
6 - All of above
9%
0%
9%
0%
36%
45%
Risk Mitigation Benefits
Libor + 4% => 5% T-Bill + 5% => 17% !!??
High inflation erodes debt
LOW REAL RATES
Depreciation increases USD
debt in LCY terms
High volatility on P&L due
to FX movements Stable earnings
Fully exposed to
devaluations and shocks
Zero currency risk !
Better credit !
Higher leverage
Better rating
Cheaper funding
Theme 1 - expensive (2) 26
In my view local currency (LCY) financing is too expensive
(as opposed to HCY):
1 - True
2 - Not sure
3 - False, it depends on several factors and risk appetite
Theme 1 - expensive (2)
In my view local currency (LCY) financing is too expensive
(as opposed to HCY):
1 - True34%
2 – Not sure
14%
3 – False, it depends on several factors and risk
51%
12%
27%
62%
TCX Profitability - IRR over Libor
Source : TCX, 30 April 12
-1,73%
0,31%
1,15%
-3%
-2%
-1%
0%
1%
2%
3%
Theme 2 – complexity (2)26
LCY hedging is too complex. The legal and technical
complexities are too great for the beneift it provides.
1 - Yes
2 – No
0
1 - Yes
2 - No
37%
63%
8%
92%
LCY hedging is too complex. The legal and technical
complexities are too great for the beneift it provides.
Question 1 :
The term “synthetic” loan refers to the fact that 28
1 - a derivative contract is traded next to the loan
2 – the loan is provided by an off-shore lender
3 – The fact that the currency hedge shields the currency rate and
the interest rate when you enter into the swap making your loss
completely remote
4 - the fact that settlement by the borrower of his obligations is in
hard currency, although the amount payable is a function of a local
currency principal and interest rate.
1 - The fact I trade a derivative contract on the top of a loan
2 - the loan is provided by an off-shore lender
3 - The currency hedge makes your loss remote therefore the term
synthetic
4 - the fact that settlement by the borrower of his obligations is in
hard currency, although the amount payable is a function of a
local currency principal and interest rate.
4%
11%
21%
64%
Questions 2 :
The most important contractual aspect of a synthetic
loan for an MFI is :
27
1 - The fact the MFI may face unwind costs in the event of a
prepayment
2 - The settlement occurs in hard currency (although the loan is
denominated in LCY)
3 - The potential difference that could exist between the (currency)
reference rate TCX uses at each fixing date of the swap and the
actual spot rate at which the MFI trades to settle the loan
4 - The client settles his repayment obligation denominated in
in LCY by purchasing USD at the best available spot rate
1 - The fact the client may face unwind costs in the event of a
prepayment
2 - The settlement occurs in hard currency (although the loan is
denominated in LCY)
3 - The potential difference that could exist between the reference
rate TCX uses at each fixing date of the swap and the actual spot
rate at which the client trades to settle the loan
4 - The client settles his repayment obligation denominated in
in LCY by purchasing USD at the best available spot rate
11%
30%
44%
15%
Question 3 :
TCX could directly hedge a bank for the following
reasons 27
1 – the bank has an existing USD loan that he would like to restate
in LCY but cannot amend the existing USD loan
2 - the interest rates in LCY have decreased rapidly and an bank
would like to benefit from these rates
3 - the bank feels the danger of being exposed to a currency risk
and wishes to hedge that risk
4 – the bank would like to lend more in LCY to his clients and for
that needs to swap his USD into LCY
5 - All above are good reasons to hedge with TCX
1 – a bank has an existing USD loan that he would like to restate in
LCY but cannot amend the existing USD loan
2 - the interest rates in LCY have decreased rapidly and an MFI
would like to benefit from these rates
3 - a bank feels the danger of being exposed to a currency risk and
wishes to hedge that risk
4 – a bank would like to lend more in LCY to his clients and for that
needs to swap his USD into LCY
5 - All above are good reasons to
hedge with TCX
4%
4%
15%
15%
63%
Question 4 :
TCX can directly hedge an MFI for the following reasons 19
1 - an MFI has issued a bond in USD and would like to swap the
proceeds in LCY
2 - an MFI has received a guarantee (collateral waiver) from EFSE as
an incentive to hedge its foreign exchange risk with TCX
3 - an MFI has a strong view on local interest rates and despite
being matched wishes to express that view through a cross currency
swap to make a small profit
4 - All above are good reasons to hedge with TCX
1 - an MFI has issued a bond in USD and would like to swap the
proceeds in LCY
2 - an MFI has received a guarantee from EFSE as an incentive to
hedge its foreign exchange risk with TCX
3 - an MFI has a strong view on local interest rates and despite
being matched wishes to express that view through a cross currency
swap to make a small profit
4 - All above are good reasons to hedge with TCX
11%
11%
0%
79%
Question 5 :
The term non-deliverable swap (NDS) or non-
deliverable forward (NDF) refers to
25
1 - The fact neither me or TCX will ever get paid in HCY
2 - The total value of the swap is paid only over the life of the swap
3 - the fact that these are used to hedge currency risk but that all
cash flows between the two counterparties are made in HCY
4 - The fact TCX will net off the HCY and LCY leg of the instrument
on a LCY basis only
1 - The fact neither me or TCX will ever get paid in HCY
2 - The total value of the swap is paid only over the life of the swap
3 - the fact that these are used to hedge currency risk but that all
cash flows between the two counterparties are made in HCY
4 - The fact TCX will net off the HCY and LCY leg of the instrument
on a LCY basis only
0%
8%
60%
32%
Question 6 :
You can receive 4-yr funding
at 8% in USD or at 21% in AMD.
You say that:
28
1 - AMD is more expensive but much less risky for me than USD
2 - AMD is less risky and it depends on (impact of) inflation,
whether the AMD is more expensive than USD
3 - If I take USD, I should (based on historical AMD performance)
expect to add 5-10% p/a for FX loss
1 - AMD is more expensive but much less risky for him
2 - AMD is less risky and it depends on (impact of) inflation,
whether the AMD is more expensive than USD
3 - If he takes USD, he should (based on historical AMD
performance) expect to add 5-10% p/a for FX loss
18%
39%
43%
Question 7 :
Your bank wants to better serve its customers
through local currency products in Hryvnya and
has requested funding from EFSE:
24
1 – You request a EUR loan because Hryvnya funding rates are too
high
2 - You do not bother about the Hryvnya alternative and take the
EUR but factor in the increased risk into the credit margin you
charge to your customers
3 – you take the cheapest EUR loan, request a guarantee from EFSE
to hedge it with TCX right after disbursement
4 - you take the cheapest EUR loan, knowing that when the
currency will start depreciating you will hedge the principal with
a forward (possibly with TCX)
1 – You request a EUR loan because Hryvnya funding rates are too
high
2 - You do not bother about the Hryvnya alternative and take the
EUR but factor in the increased risk into the credit margin you
charge to your customers
3 – you take the cheapest EUR loan, request a guarantee from EFSE
to hedge it with TCX right after disbursement
4 - you take the cheapest EUR loan, knowing that when the
currency will start depreciating you will hedge the principal with
a forward (possibly with TCX)
0%
4%
79%
17%
Question 8 :
Systematic hard currency financing of utilities
(hydro power, toll roads) in frontier
markets may result in:25
1 - A perpetuate cycle of increased inflation and depreciation
2 – Volatility of earnings and impaired budget planning
3 - Systemic risk and impaired monetary policy
4 - Under-investment in utility assets
5 - All of the above
1 - A perpetuate cycle of increased inflation and depreciation
2 - Volatility of earnings and impaired budget planning
3 - Systemic risk and impaired monetary policy
4 - Under-investment in utility assets
5 - All of the above
16%
16%
16%
0%
52%
Question 9 :
To price a floating rate local currency loan, lenders
and EFSE select a local benchmark.
A benchmark must:26
1 - Be observable for anyone
2 - Frequently issued/established/agreed
3 - In sufficient volumes
4 - Market driven (no political interference)
5 - Not be influenced by inflation
6 - All of the above
1 - Be observable for anyone
2 - Frequently issued/established/agreed
3 - In sufficient volumes
4 - Market driven
(no political interference)
5 - Not be influenced by inflation
6 - All of the above
8%
8%
0%
15%
0%
69%
Question 10 :
Local currency financing:22
1 - Is more expensive than USD/EURO financing, but in return, the
borrower is less exposed to risk
2 - Should with normal functioning markets be fully price
competitive with hard currency
3 - Is, aggregating all costs and benefits, cheaper than USD funding
4 - It depends on the borrower, tenor of the loan, the currency
1 - Is more expensive than USD/EURO financing, but in return, the
borrower is less exposed to risk
2 - Should with normal functioning markets be fully price
competitive with hard currency
3 - Is, aggregating all costs and benefits, cheaper than USD funding
4 - It depends on the borrower, tenor of the loan, the currency
18%
36%
0%
45%
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