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Bob Jensen's web site is at http://www.trinity.edu/rjensen
Working Paper 289 Case on Foreign Currency Swap Valuation and Accounting
Foreign Currency Hedge of Fixed-Rate Interest-Bearing Foreign Debt at 8.00% Loan Rate

Statement on derivatives is available as Publication Number 186-B, June 1998, Product Code S133
           FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
           FASB Statement No. 138, an amendment of FASB Statement No. 133, Document No. 210-B
           Call (800) 748-0659 or go to web site http://www.rutgers.edu/Accounting/raw/fasb/home2.html
           Copies are subject to academic discounting.




Questions This is Bob Jensen's answer file.

Foreign Currency Hedge of Fixed-Rate Interest-Bearing Foreign 8.00% Debt

XYZ Company's existing DM obligation
On July 1, 20X1, XYZ Company has an obligation to make eight remaining interest payments
in German marks at DM600,000 per quarter on a DM20 million outstanding note payable. The
fixed-interest rate is 8.00% per annum or 2.00% per quarter. David Burns, the
 the CFO of XYZ, worries that the the German mark will grow stronger against the U.S. dollar,
leading to foreign currency losses in both the DM600,000 payments and the $20 million pay off.

XYZ enters into a currency swap with ABC Bank
On July 1, 20X1, ABC Bank enters into a two-year pay-fixed German DM 10.25%, receive-fixed
US$ 10.22%. The swap dealer that negotiates the swap and guarantees payments
takes 5 basis points (0.05%) such that the ABC receives US$ 10.22% of 10.27% owed by XYZ, and
XYZ receives only DM 10.20% from the 10.25% owed by ABC. Hence, XYZ owes $256,750
on the swap each quarter and receives DM510,000 in return. The swap is actually
net settled using the spot currency exchange rate at the end of each quarter.

One of the purposes of this case is to analyze underhedging versus overhedging of swaps
that are not perfect matches for hedging. This case is does not have a matched hedge,
because the 8% hedged item note rate is not equal to the 10.2% swap receivable leg of
the hedging swap. To be a matched hedge, both interest rates would have to be equal.

Suppose we define the swap receivable rate as (R+U), where R is the rate of the hedged
item and U is the underhedged or overhedged rate. For example, when (R+U)=.1020, then
a note rate of R=0.1020 implies that this is a "matched hedge" with U=0. However, if R=0.0800, there is an overhedging
the hedged item is underhedged by 0.1020-0.1200 = -0.0180 or -1.80%.

When the hedged item is underhedged, some FX risk remains, because not all of the
hedged item is protected from fluctuations in foreign currency rates. When the hedged
item is overhedged, then there is also foreign exchange risk of receiving too many
German marks relative to the note's interest rate. Under FAS 133, all changes in the
swap value can be charged to Other Comprehensive Income (OCI) only if there is no
overhedging. If there is overhedging the proportion of the changes in value of the swap
must be charged to current earnings rather than OCI. When u>0, that proportion
is u/(r+u).

At the beginning of the swap, notional amounts are exchanged such that ABC receives
DM20 million and pays XYZ $10 million in US dollars. When the swap is terminated,
ABC receives its $10 million back and returns the DM20 million to the XYZ Company. XYZ
in turn, uses this DM20 million to pay off its existing debt in German marks on June 30, 2003.

In summary, XYZ company declares the swap with ABC Bank as a foreign currency hedge
against its existing obligation. Since only DM510,000 is received each quarter under the swap, the swap
leaves XYZ DM90,000 short of a matched hedge needed for DM600,000 payments

Assume the following ex post outcomes with respect to XYZ Company's books:

              Ex Post       Loan           XZY Net             Swap's               XYZ
            Spot DM/$     Payment           Swap              Estimated           Accrued
 Quarter       Rate        in DM          Cash Flow             Value             Interest
 07/01/01     2.0000                          $0                 $0                  $0
 09/30/01     2.0225        600000         ($4,587)           ($3,891)               $0
 12/31/01     2.0150        600000         ($3,648)            $4,996              ($100)
 03/31/02     1.9875        600000          ($146)             $5,972               $128
 06/30/02     1.9750        600000          $1,478             $9,770               $153
 09/30/02     1.9685        600000          $2,331            $16,782               $251
 12/31/02     1.9480        600000          $5,057            $11,737               $431
 03/31/03     1.9325        600000          $7,157             $7,646               $301
 06/30/03     1.9300        600000          $7,499               $0                  $0

Assume that the FX hedge is perfectly effective for whatever portion
of the loan is being hedged.

    1       = Question Number
    1       If XYZ Company does not enter into the swap with ABC Bank, what
    1       interest rate risk and foreign currency risks are faced by XYZ?
    1
    1       There is no interest rate risk, because its DM20 million outstanding loan has a
    1       fixed 8.00% rate of interest. However, since the interest is payable in German
    1       marks, there is a foreign currency risk in that the amount of dollars needed to
    1       acquire the German marks for each payment may vary with the DM/$ FX rate.
    1       Also there is a huge foreign exchange risk on the DM20 million that must be
    1       repaid at maturity of the loan.
    1
    1       Since the DM20 million note is at a fixed rate, there is a fair value risk in that
    1       the value of the note will vary inversely with movements in interest rates. XYZ
    1       did not hedge fair value with this swap since all legs of the swap are at fixed
    1       interest rates.
    2
    2       = Question Number
2
2   If XYZ Company swaps with ABC Bank, is this a cross-currency hedge for XYZ Company?
2
2   No! Both legs of the hedge have a fixed rate of interest. For a cross-currency
2   hedge, one of the legs must have a variable (floating) rate. You can read
2   about cross-currency hedges under "Foreign Currency Hedges" in Bob Jensen's
2   FAS 133 and IAS 39 Glossary at the website shown below:
2   http://www.trinity.edu/ACCT5341/speakers/133glosf.htm#F-Terms
2
3
3   = Question Number
3   ABC Bank is taking on a FX risk by by agreeing to send an uncertain amount of
3   German marks to XYZ Company each quarter. Why might ABC Bank want to
3   enter into such a swap?
3
3   ABC Bank might be hedging an investment that returns quarterly cash flows
3   in German marks. The swap, thereby, hedges some or all of the FX risk of
3   investment.
3
3   ABC Bank may have better credit standing in Germany than in the U.S. As a
3   result of the swap, ABC Bank may have obtained its best possible
3   loan in U.S. dollars.
3
3   Of course ABC Bank might also be speculating that the German mark is
3   going to weaken against the dollar. It is more likely, however, that ABC
3   Bank has one of the other reasons mentioned above.
4
4   = Question Number
4   If the DM20 million debt has a fixed rate of 8.00%, has XYZ Company underhedged
4   or overhedged its FX risk with the specified swap with ABC Bank? How much
4   was lost or gained by not having a matched hedge (assuming no added speculation)?
4
4   Make a table showing the extent of underhedging or overhedging each quarter
4   ex post after the incurred DM/$ foreign exchange rates are know for certain.
4
4   Recall that there are two types of FX risk involved. The huge FX risk of having
4   DM20 million marks available at the debt's maturity date is perfectly hedged by
4   the swap. The quarterly interest payments of DM600,000 under the 8.00% loan
4   rate, however, are overhedged since the swap returns DM510,000 to XYZ when
4   only DM400,000 are needed for the quarterly interest payments on the 8.00% note.
4
4   The amount of overhedging is -DM110,000 = DM400,000-DM510,000. This translates
4   into a $7,715 opportunity loss from not having a matched hedge of $22,855.
4
4
4   Sensitivity Analysis: You can change the value in blue Cell G68 from the original 8.00%:
4                            You can change XYZ's original unhedged note rate to R in Cell G68 =
4                  Ex Post      Unhedged            Hedged              Note
4                Spot DM/$        Interest          Interest           Interest
4     Quarter       Rate           in DM             in DM              in DM
4     07/01/01      2.0000
4     09/30/01      2.0225          (110000)             400000             400,000
4     12/31/01      2.0150          (110000)             400000             400,000
4     03/31/02      1.9875          (110000)             400000             400,000
4     06/30/02      1.9750          (110000)             400000             400,000
4     09/30/02      1.9685          (110000)             400000             400,000
4     12/31/02      1.9480          (110000)             400000             400,000
4     03/31/03      1.9325          (110000)             400000             400,000
4     06/30/03      1.9300          (110000)             400000             400,000
4
4
4                                 Case Hedge          Hypothetical        Overhedging
4                                   8.00% Matched Hedge                        of
4                  Ex Post     With a        With a                         10.20%
4                 Spot DM/$   10.20%          8.00%                         Versus
4     Quarter       Rate    Swap Rec. Leg Swap Rec. Leg                      0.0800
4     07/01/01      2.0000
4     09/30/01      2.0225           10.20%              8.00%               2.20%
4     12/31/01      2.0150           10.20%              8.00%               2.20%
4     03/31/02      1.9875           10.20%              8.00%               2.20%
4     06/30/02      1.9750           10.20%              8.00%               2.20%
4     09/30/02      1.9685           10.20%              8.00%               2.20%
4     12/31/02      1.9480           10.20%              8.00%               2.20%
4     03/31/03      1.9325           10.20%              8.00%               2.20%
4     06/30/03      1.9300           10.20%              8.00%               2.20%
4
4
4
4                                                                    Deviation of the actual hedge from m
4
4
4   The value of the swap each quarter is not affected directly by interest rate movements unless the
4
4
4   Thus, in hind sight the German mark strengthened against the dollar, and
4   the hedge saved XYZ Company $15,140. A matched swap would have
4   generated another $7,715 to fully hedge all DM600,000 per quarter.
4
4   Of course, if the German mark had weakened, XYZ Company would have
4   lost on the swap.
5
5   = Question Number
5   How come the gain on the swap is the same $15,140 when the note's interest
5   rate is 12.00% or 8.00%? Shouldn't the XYX Company earn higher profits on
5   as a result of having a lower note interest?
5
5   Actually the XYZ Company has less interest expense when the note's interest
5   is 8.00% instead of 12.00%. However, the net swap cash flows depend upon the
5   fixed rates of interest on the swap legs. This rate does not change with the
5   hedged item (DM 10 million note) rate.
6
6   = Question Number
6   Record the DM 20 million loan as if it commenced on July 1, 20X1, and then
6   record all interest payments, swap payments, interest accruals, and the adjustment
6   of the swap to fair value each quarter. For the interest accruals, simply multiply
6   the swap balance (value) at the end of the previous period by 2.55% = 10.2%/4.
6
6   Hint: If the loan interest payments are underhedged, assume all the change in
6   the swap's value can be charged to Other Comprehensive Income (OCI). However,
6   if there is an overhedge, the overhedged proportion of changed swap value must
6   be charged to current earnings (Interest Expense and Revenue) rather than OCI.
6   Be able to reason why this is the case.
6
7
7   = Question Number
7   Does the earnings impact differ with respect to overhedging versus underhedging
7   in this illustration? Explain the importance to XYZ Company.
7
7   With underhedging, all changes in XYX's swap value were debited or credited
7   to Other Comprehensive Income (OCI). Hence, changes in swap value did not
7   impact upon the level or variability or earnings per share.
7
7   With overhedging, it is a different matter. When XYZ Company has more German
7   marks coming in than are needed to make the hedged item's payments, a portion of the change in the swa
7   or credited to current earnings rather than OCI. Those portions of swap value
7   change impact both upon the amount and variability of net income. Furthermore,
7   those "excess" value changes do not affect cash flows. In other words, a large
7   increase in swap value due to overhedging will not increase the amount of cash
7   in the till beyond what the net swap cash flows themselves. You can see this by
7   examining the journal entries in this case.
7
7
8
8   = Question Number
8   Show the impact of under hedging versus overhedging on quarterly earnings,
8   assuming a 10.2% swap receivable leg that is specified in this case. In other words,
8   keep the swap receivable rate constant, but vary the DM20 million note's interest rate
8   across 6%, 7%, 8%, 9%, 10.2%, 11%, and 12$.
8
8   Hint: The 8% and 12% outcomes are shown below:
8
8                             10.2% Swap Receivable
8                                 XZY Net            Swap's           Loss (Gain)
8                                  Swap             Estimated            From
8                                Cash Flow             Value          Overhedge
8                  07/01/01       ($4,587)           ($3,891)                  $839
8                  09/30/01       ($3,648)            $4,996                ($1,917)
8                 12/31/01       ($146)            $5,972                 ($211)
8                 03/31/02       $1,478            $9,770                 ($819)
8                 06/30/02       $2,331           $13,791                 ($867)
8                 09/30/02       $5,057           $11,737                  $443
8                 12/31/02       $7,157            $7,646                  $882
8                 03/31/03       $7,499              $0                  $1,649
8                                     Overhedging Total =                   $0
8                    XYZ Loan Rate on DM20 Million Note =                8.00%
8
8
8
8
8
8
9
9   = Question Number
9   Show the underhedging or overhedging dollar amount portions of a 10.2% hedging
9   swap receivable leg used to hedge the $20 million note at interest rates varying
9   across 6%, 7%, 8%, 9%, 10.2%, 11%, and 12$.
9
9   Hint: The 8%, 10.2%, and 12% outcomes are shown below:
9
9               10.2% Swap      Under or          Under or          Under or
9                 XZY Net        (Over)            (Over)            (Over)
9                    Swap       Hedged            Hedged            Hedged
9                Cash Flow      Amount            Amount            Amount
9    07/01/01      ($4,587)         (54,388)          0                  44,499
9    09/30/01      ($3,648)         (54,591)          0                  44,665
9    12/31/01       ($146)          (55,346)          0                  45,283
9    03/31/02       $1,478          (55,696)          0                  45,570
9    06/30/02       $2,331          (55,880)          0                  45,720
9    09/30/02       $5,057          (56,468)          0                  46,201
9    12/31/02       $7,157          (56,921)          0                  46,572
9    03/31/03       $7,499          (56,995)          0                  46,632
9                                 ($446,285)         $0                $365,142
9        XYZ Loan Rate =             8.00%             10.20%           12.00%
9
9
9
9
9
est payments
 payable. The

he U.S. dollar,
 million pay off.


 receive-fixed

owed by XYZ, and




er, if R=0.0800, there is an overhedging of U=0.022 or 2.20%. Conversely, if R=0.1200, there the hedged item
 une 30, 2003.


under the swap, the swap
ge for XYZ Company?




Bob Jensen's




 underhedged

ded speculation)?




 e 8.00% note.

 This translates




m the original 8.00%:          Actual   Interest Expense
 ote rate to R in Cell G68 =   0.0800         0.0800       8.00%      8.00%      Under or
               Swap Hedge Received       Matched Overhedged        Underhedged   (Over)
                 Rec. Leg     0.1027      Swap        Due to         Due to      Hedged
                                       Swap Rec. Leg Swap in $
                Fixed Rate Swap Rec. Leg                            Swap in $    Amount
                0.1020         $252,163        $197,775        ($54,388)            $0          ($54,388)
                0.1020         $253,102        $198,511        ($54,591)            $0          ($54,591)
                0.1020         $256,604        $201,258        ($55,346)            $0          ($55,346)
                0.1020         $258,228        $202,532        ($55,696)            $0          ($55,696)
                0.1020         $259,081        $203,200        ($55,880)            $0          ($55,880)
                0.1020         $261,807        $205,339        ($56,468)            $0          ($56,468)
                0.1020         $263,907        $206,986        ($56,921)            $0          ($56,921)
                0.1020         $264,249        $207,254        ($56,995)            $0          ($56,995)
                             $2,069,140      $1,622,855       ($446,285)           $0          ########

                0.0800                         8.00%    Interest Expense
              Proportion      Change in      Swap Value       8.00%               0.00%          10.20%
            Overhedged          Swap's      (Overhedged)   With a               Without        Amount
              Due to          Estimated        Due to     10.20%                  The          Saved by
            Swap in %            Value        Swap in $ Swap Rec. Leg            Swap           Swap
                                  $0
                0.2157         ($3,891)          $839          $197,775         $197,775         ($4,587)
                0.2157          $8,887         ($1,917)        $198,511         $198,511         ($3,648)
                0.2157           $976           ($211)         $201,258         $201,258          ($146)
                0.2157          $3,799          ($819)         $202,532         $202,532          $1,478
                0.2157          $4,020          ($867)         $203,200         $203,200          $2,331
                0.2157         ($2,054)          $443          $205,339         $205,339          $5,057
                0.2157         ($4,090)          $882          $206,986         $206,986          $7,157
                0.2157         ($7,646)         $1,649         $207,254         $207,254          $7,499
                              Interest on note = $1,622,855 $1,622,855  $15,140
                             Swap loss (gain) = ($15,140)    $431,145   ########
                                Change in RE = $1,607,715   $2,054,000  ########
tion of the actual hedge from matched hedge = $446,285
                     Matched hedge outcome = $2,054,000 if the hedged note rate =
          (Note that just because the hedge is not matched, does not make it ineffective under FAS 133 definitions of ineffectiveness.)
movements unless the
nd upon the




the adjustment
ply multiply




OCI). However,
 p value must
 er than OCI.




underhedging




more German
nts, a portion of the change in the swap value providing those excess marks must be debited

 Furthermore,

ount of cash
 n see this by




 In other words,
ote's interest rate




                 Loss (Gain)
                    From
                 Overhedge
                          $0
                          $0
                   $0
                   $0
                   $0
                   $0
                   $0
                   $0
                    $0
                12.00%




10.2% hedging
e the hedged item
                     8.00%             Under or
                 Amount                (Over)
                 Saved by              Hedged
               Matched Swap            Amount

                   ($58,975)          ($54,388)
                   ($58,239)          ($54,591)
                   ($55,492)          ($55,346)
                   ($54,218)          ($55,696)
                   ($53,550)          ($55,880)
                   ($51,411)          ($56,468)
                   ($49,764)          ($56,921)
                   ($49,496)          ($56,995)
                  ($431,145)         ($446,285)




              10.20%                 instead of 8.00%
er FAS 133 definitions of ineffectiveness.)
Warning: This file is best viewed in Excel software rather than in a web browser.
Computations and Journal Entries
Working Paper 289 Case on Foreign Currency Swap Valuation and Accounting
Foreign Currency Hedge of Fixed-Rate Interest-Bearing Foreign Debt at 8.00% Loan Rate




Working Paper 289
                              Ex Post            XYZ                  ABC
                             Spot DM/$         US$ Swap             DM Swap
         Quarter               Rate             Notional            Notional        Quarter
           0                  2.0000          $10,000,000          20,000,000       07/01/01
           1                  2.0225          $10,000,000          20,000,000       09/30/01
           2                  2.0150          $10,000,000          20,000,000       12/31/01
           3                  1.9875          $10,000,000          20,000,000       03/31/02
           4                  1.9750          $10,000,000          20,000,000       06/30/02
           5                  1.9685          $10,000,000          20,000,000       09/30/02
           6                  1.9480          $10,000,000          20,000,000       12/31/02
           7                  1.9325          $10,000,000          20,000,000       03/31/03
           8                  1.9300          $10,000,000          20,000,000       06/30/03



Summary of Unhedged Versus Hedged Note Interest
                            Unhedged           Foreign             Change in
                               Note            Currency            Retained
                             Interest           Swap               Earnings
         07/01/01              197,775               (4,587)            202,362
         09/30/01              198,511               (3,648)            202,159                      10,000
         12/31/01              201,258                 (146)            201,404                       8,000
                                                                                      U.S. Dollars




         03/31/02              202,532                1,478             201,054                       6,000
         06/30/02              203,200                2,331             200,870                       4,000
         09/30/02              205,339                5,057             200,282
                                                                                                      2,000
         12/31/02              206,986                7,157             199,829                      (2,000)
         03/31/03              207,254                7,499             199,755                      (4,000)
                    Total = $1,622,855              $15,140          $1,607,715                      (6,000)



Question: Why does the hedged note rate of interest vary when the original note rate
            of interest is 8.00% on a principal of DM 20 million?

Answer:
The hedged interest expense is not constant each quarter, because more than 8.00%
interest is hedged. Only 8.00% swap leg is needed for a matched hedge. The 10.2% leg
for DM200,000 quarterly payments provides more German marks that are needed
to hedge the note's interest payments. This results in a swap speculation based upon the
2.2% = 10.2% - 8.00% excess fixed rate on the receiving leg of the swap.

There are two ways to hedge only the note interest. Either the note interest rate
should have been equal to the swap interest rate of 10.20%, or the swap rate of interest
should have been equal to the 12.00% note rate of interest.

In this solution, you are allowed to examine the sensitivity of the hedge by changing the original
note rate of interest in Cell G68.


Sensitivity Analysis: You can change the value in blue Cell G68 from the original 8.00%:
                                       You can change XYZ's original unhedged note rate to R in Cell G68 =
                            Ex Post       Unhedged             Hedged              Note
                           Spot DM/$         Interest           Interest          Interest
        Quarter               Rate            in DM              in DM             in DM
        07/01/01             2.0000
        09/30/01             2.0225          (110000)            400000           400,000
        12/31/01             2.0150          (110000)            400000           400,000
        03/31/02             1.9875          (110000)            400000           400,000
        06/30/02             1.9750          (110000)            400000           400,000
        09/30/02             1.9685          (110000)            400000           400,000
        12/31/02             1.9480          (110000)            400000           400,000
        03/31/03             1.9325          (110000)            400000           400,000
        06/30/03             1.9300          (110000)            400000           400,000



                                           Case Hedge         Hypothetical      Overhedging
                                             8.00%          Matched Hedge            of
                            Ex Post         With a             With a             10.20%
                           Spot DM/$       10.20%               8.00%             Versus
        Quarter               Rate       Swap Rec. Leg      Swap Rec. Leg          0.0800
        07/01/01             2.0000
        09/30/01             2.0225          10.20%               8.00%            2.20%
        12/31/01             2.0150          10.20%               8.00%            2.20%
        03/31/02             1.9875          10.20%               8.00%            2.20%
        06/30/02             1.9750          10.20%               8.00%            2.20%
        09/30/02             1.9685          10.20%               8.00%            2.20%
        12/31/02             1.9480          10.20%               8.00%            2.20%
        03/31/03              1.9325           10.20%               8.00%             2.20%
        06/30/03              1.9300           10.20%               8.00%             2.20%




                                                                                       Deviation of the actual hedg


The value of the swap each quarter is not affected directly by interest rate movements unless the
swap has a variable interest rate leg to the swap. In the Working Paper 289 case. Both XYZ Company
and ABC Bank have fixed interest rates. Hence, interest rate movements do not impact upon the
swap value in the Working Paper 289 case.

The value of the swap each quarter is affected by the ex ante forward rates of exchange between
German marks and U.S. dollars. XYZ's swap receipts are affected by the ex post spot rates.
In the table below, students can study the impact of changing exchange rates on the hedge.

Students may change any value in blue shown below.

                              DM/$              DM/$                DM/$              DM/$
                             Ex Post          Ex Ante              Ex Ante           Ex Ante
                               FX                FX                  FX                FX
          Date                Rates            Rates                Rates             Rates
        07/01/01             2.0000           09/30/01
        09/30/01             2.0225            2.0000             12/31/01
        12/31/01             2.0150            1.9945              1.9985            03/31/02
        03/31/02             1.9875            1.9937              1.9975             1.9875
        06/30/02             1.9750            1.9830              1.9950             1.9825
        09/30/02             1.9685            1.9825              1.9900             1.9800
        12/31/02             1.9480            1.9800              1.9875             1.9775
        03/31/03             1.9325            1.9795              1.9850             1.9750
        06/30/03             1.9300            1.9743              1.9825             1.9725




The journal entries corresponding to the above outcomes are shown below.



        7/1/2001           Cash
                           Notes payable
                           -To record the 12% Note payable in German marks

        7/1/2001           Cash
             Cash
             -To record the swap of notional amounts

             Foreign currency swaps receivable/payable
 7/1/2001    OCI adjusted for changes in the swap valuation
             Loss (gain) on swap overhedging
             -To record change in swap's fairvalue




9/30/2001    Interest expense/revenue
             Cash
             -To record payment on German mark note

9/30/2001    Interest expense/revenue
             Cash
             -To record swap receipt (payment)

9/30/2001    Foreign currency swaps receivable/payable
             Accrued interest on swap
             OCI adjusted for changes in the swap valuation
             Loss (gain) on swap overhedging
             -To record change in swap's fairvalue

9/30/2001    Retained earnings
             Interest expense/revenue
             Loss (gain) on swap overhedging
             -To close expense and revenue accounts




12/31/2001   Interest expense/revenue
             Cash
             -To record payment on German mark note

12/31/2001   Interest expense/revenue
             Cash
             -To record swap receipt (payment)

12/31/2001   Foreign currency swaps receivable/payable
             Accrued interest on swap
             OCI adjusted for changes in the swap valuation
             Loss (gain) on swap overhedging
             -To record change in swap's fairvalue

12/31/2001   Retained earnings
             Interest expense/revenue
             Loss (gain) on swap overhedging
            -To close expense and revenue accounts




3/31/2002   Interest expense/revenue
            Cash
            -To record payment on German mark note

3/31/2002   Interest expense/revenue
            Cash
            -To record swap receipt (payment)

3/31/2002   Foreign currency swaps receivable/payable
            Accrued interest on swap
            OCI adjusted for changes in the swap valuation
            Loss (gain) on swap overhedging
            -To record change in swap's fairvalue

3/31/2002   Retained earnings
            Interest expense/revenue
            Loss (gain) on swap overhedging
            -To close interest expense/revenue




6/30/2002   Interest expense/revenue
            Cash
            -To record payment on German mark note

6/30/2002   Interest expense/revenue
            Cash
            -To record swap receipt (payment)

6/30/2002   Foreign currency swaps receivable/payable
            Accrued interest on swap
            OCI adjusted for changes in the swap valuation
            Loss (gain) on swap overhedging
            -To record change in swap's fairvalue

6/30/2002   Retained earnings
            Interest expense/revenue
            Loss (gain) on swap overhedging
            -To close interest expense/revenue




9/30/2002   Interest expense/revenue
             Cash
             -To record payment on German mark note

9/30/2002    Interest expense/revenue
             Cash
             -To record swap receipt (payment)

9/30/2002    Foreign currency swaps receivable/payable
             Accrued interest on swap
             OCI adjusted for changes in the swap valuation
             Loss (gain) on swap overhedging
             -To record change in swap's fairvalue

9/30/2002    Retained earnings
             Interest expense/revenue
             Loss (gain) on swap overhedging
             -To close interest expense/revenue




12/31/2002   Interest expense/revenue
             Cash
             -To record payment on German mark note

12/31/2002   Interest expense/revenue
             Cash
             -To record swap receipt (payment)

12/31/2002   Foreign currency swaps receivable/payable
             Accrued interest on swap
             OCI adjusted for changes in the swap valuation
             Loss (gain) on swap overhedging
             -To record change in swap's fairvalue
12/31/2002
             Retained earnings
             Interest expense/revenue
             Loss (gain) on swap overhedging
             -To close interest expense/revenue




3/31/2003    Interest expense/revenue
             Cash
             -To record payment on German mark note

3/31/2003    Interest expense/revenue
             Cash
             -To record swap receipt (payment)
     3/31/2003   Foreign currency swaps receivable/payable
                 Accrued interest on swap
                 OCI adjusted for changes in the swap valuation
                 Loss (gain) on swap overhedging
                 -To record change in swap's fairvalue

     3/31/2003   Retained earnings
                 Interest expense/revenue
                 Loss (gain) on swap overhedging
                 -To close interest expense/revenue




     6/30/2003   Interest expense/revenue
                 Cash
                 -To record payment on German mark note

     6/30/2003   Interest expense/revenue
                 Cash
                 -To record swap receipt (payment)

     6/30/2003   Foreign currency swaps receivable/payable
                 Accrued interest on swap
                 OCI adjusted for changes in the swap valuation
                 Loss (gain) on swap overhedging
                 -To record change in swap's fairvalue

     6/30/2003   Retained earnings
                 Interest expense/revenue
                 Loss (gain) on swap overhedging
                 -To close interest expense/revenue

     6/30/2003   Cash
                 Cash
                 -To record exchange of swap notionals

                 Cash
                 Notes payable
                 -To record payoff of original German mark note




Summary of Unhedged Versus Hedged Note Interest
                  Unhedged         Foreign               Change in      10.20%
                     Note          Currency              Retained       Swap
                   Interest         Swap                 Earnings        Value
     07/01/01        197,775             (4,587)              202,362      ($3,891)
09/30/01             198,511         (3,648)     202,159     $4,996
12/31/01             201,258           (146)     201,404     $5,972
03/31/02             202,532          1,478      201,054     $9,770
06/30/02             203,200          2,331      200,870    $13,791
09/30/02             205,339          5,057      200,282    $11,737
12/31/02             206,986          7,157      199,829     $7,646
03/31/03             207,254          7,499      199,755         $0
           Total = $1,622,855       $15,140    $1,607,715
                                Loan Rate =       8.00%
                   XYZ             XYZ              XYZ              XYZ           FX-Adjusted
               Hedged Item     Swap Payout      Swap Outgoing    Swap Incoming    Swap Incoming
              Quarterly Rate   Quarterly Rate      Dollars       Quarterly Rate      Dollars
                 2.0000%         2.5675%             $0            2.5500%             $0
                 2.0000%         2.5675%          $256,750         2.5500%          $252,163
                 2.0000%         2.5675%          $256,750         2.5500%          $253,102
                 2.0000%         2.5675%          $256,750         2.5500%          $256,604
                 2.0000%         2.5675%          $256,750         2.5500%          $258,228
                 2.0000%         2.5675%          $256,750         2.5500%          $259,081
                 2.0000%         2.5675%          $256,750         2.5500%          $261,807
                 2.0000%         2.5675%          $256,750         2.5500%          $263,907
                 2.0000%         2.5675%          $256,750         2.5500%          $264,249




                    FX Swap Cash Flows in XYC Company

         10,000
          8,000
          6,000
          4,000
          2,000
              0
         (2,000)
         (4,000)
         (6,000)
                                                       Quarter


l note rate
he 10.2% leg

ased upon the




te of interest


ing the original




                                    Actual     Interest Expense
d note rate to R in Cell G68 =      0.0800           0.0800            8.00%            8.00%
                 Swap Hedge        Received      Matched           Overhedged        Underhedged
                   Rec. Leg         0.1027        Swap               Due to            Due to
                  Fixed Rate     Swap Rec. Leg Swap Rec. Leg        Swap in $         Swap in $

                    0.1020         $252,163       $197,775           ($54,388)           $0
                    0.1020         $253,102       $198,511           ($54,591)           $0
                    0.1020         $256,604       $201,258           ($55,346)           $0
                    0.1020         $258,228       $202,532           ($55,696)           $0
                    0.1020         $259,081       $203,200           ($55,880)           $0
                    0.1020         $261,807       $205,339           ($56,468)           $0
                    0.1020         $263,907       $206,986           ($56,921)           $0
                    0.1020         $264,249       $207,254           ($56,995)           $0
                                  $2,069,140     $1,622,855         ($446,285)           $0

                     0.0800                        8.00%          Interest Expense
                   Proportion      Change in     Swap Value             8.00%           0.00%
                 Overhedged         Swap's     (Overhedged)          With a            Without
                   Due to          Estimated      Due to            10.20%               The
                 Swap in %            Value      Swap in $        Swap Rec. Leg         Swap
                                       $0
                    0.2157          ($3,891)         $839            $197,775         $197,775
                    0.2157           $8,887        ($1,917)          $198,511         $198,511
                    0.2157            $976          ($211)           $201,258         $201,258
                    0.2157           $3,799         ($819)           $202,532         $202,532
                    0.2157           $4,020         ($867)           $203,200         $203,200
                    0.2157          ($2,054)         $443            $205,339         $205,339
                  0.2157           ($4,090)             $882               $206,986            $206,986
                  0.2157           ($7,646)            $1,649              $207,254            $207,254
                                     Interest on note =                  $1,622,855           $1,622,855
                                    Swap loss (gain) =                    ($15,140)            $431,145
                                       Change in RE =                    $1,607,715           $2,054,000
  Deviation of the actual hedge from matched hedge =                      $446,285
                            Matched hedge outcome =                      $2,054,000             if the hedged note rate =
           (Note that just because the hedge is not matched, does not make it ineffective under FAS 133 definitions of ineffectiveness.)

h XYZ Company




                   DM/$             DM/$                DM/$                 DM/$
                  Ex Ante          Ex Ante             Ex Ante              Ex Ante
                    FX               FX                  FX                   FX
                   Rates            Rates               Rates                Rates




                 06/30/02
                  1.9825           09/30/02
                  1.9815            1.9750             12/31/02
                  1.9750            1.9725              1.9685             03/31/03
                  1.9725            1.9675              1.9425              1.9480              06/30/03
                  1.9700            1.9500              1.9375              1.9325               1.9275
                                                2




 shown below.

                    Debit
                   (Credit)        Balance
                 10,000,000       10,000,000
                (10,000,000)     (10,000,000)


                10,000,000       20,000,000
(10,000,000)   10,000,000


     0             0
     0             0
     0             0




   Debit
  (Credit)      Balance
  197,775       197,775     9/30/2001
 (197,775)     9,802,225


   4,587        202,362     9/30/2001
  (4,587)      9,797,638


  (3,891)        (3,891)    9/30/2001
     0              0
   3,052          3,052
    839            839


  203,201       203,201     9/30/2001
 (202,362)         0
   (839)           0




   Debit
  (Credit)      Balance
  198,511       198,511     12/31/2001
 (198,511)     9,599,127


   3,648        202,159     12/31/2001
  (3,648)      9,595,479


   8,887          4,996     12/31/2001
   (100)          (100)
  (6,870)        (2,979)
  (1,917)        (1,917)
     0              0

  200,243       403,444     12/31/2001
 (202,159)         0
   1,917           0
  Debit
 (Credit)    Balance
 201,258     201,258    3/31/2002
(201,258)   9,394,221


   146       201,404    3/31/2002
  (146)     9,394,075


   976        5,972     3/31/2002
   228         128
  (994)      (5,889)
  (211)       (211)


 201,194    604,637     3/31/2002
(201,404)      0
   211         0




  Debit
 (Credit)    Balance
 202,532     202,532    6/30/2002
(202,532)   9,191,543


 (1,478)     201,054    6/30/2002
  1,478     9,193,021


  3,799       9,770     6/30/2002
    25         153
 (3,004)     (9,104)
  (819)       (819)


 200,234    804,872     6/30/2002
(201,054)      0
   819         0




 Debit
(Credit)    Balance
203,200     203,200     9/30/2002
(203,200)   8,989,820


 (2,331)     200,870    9/30/2002
  2,331     8,992,151


  4,020       13,791    9/30/2002
    98          251
 (3,251)     (13,174)
  (867)        (867)


 200,003    1,004,875   9/30/2002
(200,870)       0
   867          0




  Debit
 (Credit)    Balance
 205,339     205,339    12/31/2002
(205,339)   8,786,812


 (5,057)     200,282    12/31/2002
  5,057     8,791,869


 (2,054)      11,737    12/31/2002
   103         354
  1,508      (12,534)
   443         443

                        12/31/2002
 200,725    1,205,599
(200,282)       0
  (443)         0




  Debit
 (Credit)    Balance
 206,986     206,986    3/31/2003
(206,986)   8,584,883


 (7,157)     199,829    3/31/2003
  7,157     8,592,040
  (4,090)         7,646       3/31/2003
    (53)           301
   3,261         (8,830)
    882            882


  200,711      1,406,311      3/31/2003
 (199,829)         0
   (882)           0




   Debit
  (Credit)      Balance
  207,254       207,254       6/30/2003
 (207,254)     8,384,786


  (7,499)       199,755       6/30/2003
   7,499       8,392,285


  (7,646)           0         6/30/2003
   (301)            0
   6,299         (1,649)
   1,649          1,649


  201,404      1,607,715      6/30/2003
 (199,755)         0
   (1,649)         0


(10,000,000)   (1,607,715)    6/30/2003
 10,000,000     8,392,285


(10,000,000)   (11,607,715)
 10,000,000         0




 10.20%        Loss (Gain)
   OCI            From
 Balance       Overhedge
      $3,052           $839
     ($2,979)   ($1,917)
     ($5,889)     ($211)
     ($9,104)     ($819)
    ($13,174)     ($867)
    ($12,534)      $443
     ($8,830)      $882
     ($1,649)    $1,649
 Overhedge =       $0
Loan Rate =     8.00%
                                               Swap Valuation Calculations



                                                           07/01/01
                                                            Yield      Quarterly
                                                Maturity    Curve       yields
                                                07/01/01
                                                09/30/01      10.20%     2.550%
                                                12/31/01      10.20%     2.550%
                                                03/31/02      10.20%     2.550%
                                                06/30/02      10.20%     2.550%
                                                09/30/02      10.20%     2.550%
                                                12/31/02      10.20%     2.550%
                                                03/31/03      10.20%     2.550%
                                                06/30/03      10.20%     2.550%
                                                 Totals

 XZY Net     Swap's        XYZ     Unhedged                09/30/01
   Swap     Estimated   Accrued     Interest                Yield      Quarterly
Cash Flow      Value    Interest    Expense     Maturity    Curve       yields
    $0          $0         $0          $0       07/01/01
 ($4,587)    ($3,891)      $0      $197,775     09/30/01      10.20%     2.550%
 ($3,648)     $4,996     ($100)    $198,511     12/31/01      10.20%     2.550%
  ($146)      $5,972      $128     $201,258     03/31/02      10.20%     2.550%
  $1,478      $9,770      $153     $202,532     06/30/02      10.20%     2.550%
  $2,331     $13,791      $251     $203,200     09/30/02      10.20%     2.550%
  $5,057     $11,737      $354     $205,339     12/31/02      10.20%     2.550%
  $7,157      $7,646      $301     $206,986     03/31/03      10.20%     2.550%
  $7,499        $0         $0      $207,254     06/30/03      10.20%     2.550%
                                               Totals


                                                           12/31/01
                                                            Yield      Quarterly
                                                Maturity    Curve       yields
                                                07/01/01
                                                09/30/01      10.20%     2.550%
                                                12/31/01      10.20%     2.550%
                                                03/31/02      10.20%     2.550%
                                                06/30/02      10.20%     2.550%
                                                09/30/02      10.20%     2.550%
                                                12/31/02      10.20%     2.550%
                                                03/31/03      10.20%     2.550%
                                                06/30/03      10.20%     2.550%
                                               Totals

                                                           03/31/02
                                                            Yield      Quarterly
                                                Maturity    Curve       yields
                                          07/01/01
                                          09/30/01     10.20%     2.550%
                                          12/31/01     10.20%     2.550%
                                          03/31/02     10.20%     2.550%
                                          06/30/02     10.20%     2.550%
                                          09/30/02     10.20%     2.550%
                                          12/31/02     10.20%     2.550%
                                          03/31/03     10.20%     2.550%
                                          06/30/03     10.20%     2.550%
                                        Totals


                                                     06/30/02
                                                      Yield     Quarterly
                                         Maturity     Curve      yields
                                         07/01/01
                                         09/30/01      10.20%     2.550%
                                         12/31/01      10.20%     2.550%
                                         03/31/02      10.20%     2.550%
 Under or                                06/30/02      10.20%     2.550%
 (Over)                                  09/30/02      10.20%     2.550%
 Hedged                                   12/31/02     10.20%     2.550%
 Amount                                  03/31/03      10.20%     2.550%
                                         06/30/03      10.20%     2.550%
($54,388)                               Totals
($54,591)
($55,346)                                            09/30/02
($55,696)                                             Yield     Quarterly
($55,880)                                Maturity     Curve      yields
($56,468)                                07/01/01
($56,921)                                09/30/01      10.20%     2.550%
($56,995)                                12/31/01      10.20%     2.550%
($446,285)                               03/31/02      10.20%     2.550%
                                          06/30/02     10.20%     2.550%
                                          09/30/02     10.20%     2.550%
 10.20%         8.00%       Under or      12/31/02     10.20%     2.550%
Amount         Amount       (Over)        03/31/03     10.20%     2.550%
Saved by       Saved by     Hedged        06/30/03     10.20%     2.550%
 Swap        Matched Swap   Amount      Totals

 ($4,587)      ($58,975)    ($54,388)                12/31/02
 ($3,648)      ($58,239)    ($54,591)                 Yield     Quarterly
  ($146)       ($55,492)    ($55,346)    Maturity     Curve      yields
  $1,478       ($54,218)    ($55,696)    07/01/01
  $2,331       ($53,550)    ($55,880)    09/30/01      10.20%     2.550%
  $5,057       ($51,411)    ($56,468)    12/31/01      10.20%     2.550%
                  $7,157            ($49,764)    ($56,921)           03/31/02     10.20%     2.550%
                  $7,499            ($49,496)    ($56,995)           06/30/02     10.20%     2.550%
                 $15,140           ($431,145)   ($446,285)           09/30/02     10.20%     2.550%
                ($446,285)                                           12/31/02     10.20%     2.550%
                ($431,145)                                           03/31/03     10.20%     2.550%
                                                                     06/30/03     10.20%     2.550%
the hedged note rate = 10.20%                   instead of 8.00%   Totals
AS 133 definitions of ineffectiveness.)
                                                                                03/31/03
                                                                                 Yield     Quarterly
                                                                    Maturity     Curve      yields
                                                                    07/01/01
                                                                    09/30/01      10.20%     2.550%
                                                                    12/31/01      10.20%     2.550%
                                                                    03/31/02      10.20%     2.550%
                                                                    06/30/02      10.20%     2.550%
                                                                    09/30/02      10.20%     2.550%
                                                                    12/31/02      10.20%     2.550%
                                                                    03/31/03      10.20%     2.550%
                                                                    06/30/03      10.20%     2.550%
                                                                   Totals
                                                                         Receive fixed/Pay variable
                                                                           20,000,000 $ 10,000,000
                                                                           10.200000%   10.270000%

Quarterly     FX                      Swap                   Hedged                           No Starting     07/01/01
forward     Forward        Receive            Pay             Cash                              Swap           Swap
  rates      Rate          Variable          Fixed            Flow           Net Effect       Cash Flow        Value

  2.550%      2.0000   $      255,000   $      256,750   $     255,000   $      253,250   $            -      $      -
  2.550%      1.9945   $      255,703   $      256,750   $     255,703   $      254,656   $            -      $      -
  2.550%      1.9937   $      255,806   $      256,750   $     255,806   $      254,862   $            -      $      -
  2.550%      1.9830   $      257,186   $      256,750   $     257,186   $      257,622   $            -      $      -
  2.550%      1.9825   $      257,251   $      256,750   $     257,251   $      257,752   $            -      $      -
  2.550%      1.9800   $      257,576   $      256,750   $     257,576   $      258,402   $            -      $      -
  2.550%      1.9795   $      257,641   $      256,750   $     257,641   $      258,532   $            -      $      -
  2.550%      1.9743   $      258,321   $      256,750   $     258,321   $      259,891   $            -      $      -
                                                                                          $            -      $      -

Quarterly     FX                      Swap                   Hedged                           Estimated       09/30/01
forward     Forward        Receive            Pay             Cash                              Swap           Swap
  rates      Rate          Variable          Fixed            Flow           Net Effect       cash flow        Value

  2.550%     2.0000    $      255,000   $      256,750   $     255,000   $      253,250   $         (1,750)   $      -
  2.550%     1.9985    $      255,191   $      256,750   $     255,191   $      253,633   $         (1,559)   $   (1,520)
  2.550%     1.9975    $      255,319   $      256,750   $     255,319   $      253,888   $         (1,431)   $   (1,361)
  2.550%     1.9950    $      255,639   $      256,750   $     255,639   $      254,528   $         (1,111)   $   (1,030)
  2.550%     1.9900    $      256,281   $      256,750   $     256,281   $      255,813   $           (469)   $     (424)
  2.550%     1.9875    $      256,604   $      256,750   $     256,604   $      256,458   $           (146)   $     (129)
  2.550%     1.9850    $      256,927   $      256,750   $     256,927   $      257,104   $            177    $      152
  2.550%     1.9825    $      257,251   $      256,750   $     257,251   $      257,752   $            501    $      420
                                                                                          $         (5,787)   $   (3,891)


Quarterly     FX                      Swap                   Hedged                           Estimated       12/31/01
forward     Forward        Receive            Pay             Cash                              Swap           Swap
  rates      Rate          Variable          Fixed            Flow           Net Effect       cash flow        Value

  2.550%     2.0000    $      255,000   $      256,750   $     255,000   $      253,250   $         (1,750)   $     -
  2.550%     1.9985    $      255,191   $      256,750   $     255,191   $      253,633   $         (1,559)   $     -
  2.550%     1.9875    $      256,604   $      256,750   $     256,604   $      256,458   $           (146)   $    (143)
  2.550%     1.9825    $      257,251   $      256,750   $     257,251   $      257,752   $            501    $     476
  2.550%     1.9800    $      257,576   $      256,750   $     257,576   $      258,402   $            826    $     766
  2.550%     1.9775    $      257,901   $      256,750   $     257,901   $      259,053   $          1,151    $   1,041
  2.550%     1.9750    $      258,228   $      256,750   $     258,228   $      259,706   $          1,478    $   1,303
  2.550%     1.9725    $      258,555   $      256,750   $     258,555   $      260,360   $          1,805    $   1,552
                                                                                          $          2,306    $   4,996

Quarterly     FX                      Swap                   Hedged                           Estimated       03/31/02
forward     Forward        Receive            Pay             Cash                              Swap           Swap
  rates      Rate          Variable          Fixed            Flow           Net Effect       cash flow        Value
  2.550%     2.0000   $      255,000   $      256,750   $     255,000   $      253,250   $        (1,750) $       -
  2.550%     1.9985   $      255,191   $      256,750   $     255,191   $      253,633   $        (1,559) $       -
  2.550%     1.9875   $      256,604   $      256,750   $     256,604   $      256,458   $         (146) $        -
  2.550%     1.9825   $      257,251   $      256,750   $     257,251   $      257,752   $          501     $    488
  2.550%     1.9815   $      257,381   $      256,750   $     257,381   $      258,012   $          631     $    600
  2.550%     1.9750   $      258,228   $      256,750   $     258,228   $      259,706   $        1,478     $   1,370
  2.550%     1.9725   $      258,555   $      256,750   $     258,555   $      260,360   $        1,805     $   1,632
  2.550%     1.9700   $      258,883   $      256,750   $     258,883   $      261,016   $        2,133     $   1,881
                                                                                         $        3,093     $   5,972


Quarterly     FX                     Swap                   Hedged                           Estimated      06/30/02
forward     Forward       Receive            Pay             Cash                              Swap          Swap
  rates      Rate         Variable          Fixed            Flow           Net Effect       cash flow       Value

  2.550%     2.0000   $      255,000   $      256,750   $     255,000   $      253,250   $        (1,750)   $     -
  2.550%     1.9985   $      255,191   $      256,750   $     255,191   $      253,633   $        (1,559)   $     -
  2.550%     1.9875   $      256,604   $      256,750   $     256,604   $      256,458   $          (146)   $     -
  2.550%     1.9825   $      257,251   $      256,750   $     257,251   $      257,752   $           501    $     -
  2.550%     1.9750   $      258,228   $      256,750   $     258,228   $      259,706   $         1,478    $   1,441
  2.550%     1.9725   $      258,555   $      256,750   $     258,555   $      260,360   $        1,805     $   1,716
  2.550%     1.9675   $      259,212   $      256,750   $     259,212   $      261,674   $        2,462     $   2,283
  2.550%     1.9500   $      261,538   $      256,750   $     261,538   $      266,327   $        4,788     $   4,330
                                                                                         $        7,580     $   9,770

Quarterly     FX                     Swap                   Hedged                           Estimated      09/30/02
forward     Forward       Receive            Pay             Cash                              Swap          Swap
  rates      Rate         Variable          Fixed            Flow           Net Effect       cash flow       Value

  2.550%     2.0000   $      255,000   $      256,750   $     255,000   $      253,250   $        (1,750) $       -
  2.550%     1.9985   $      255,191   $      256,750   $     255,191   $      253,633   $        (1,559) $       -
  2.550%     1.9875   $      256,604   $      256,750   $     256,604   $      256,458   $          (146) $       -
  2.550%     1.9825   $      257,251   $      256,750   $     257,251   $      257,752   $          501     $     -
  2.550%     1.9750   $      258,228   $      256,750   $     258,228   $      259,706   $        1,478     $     -
  2.550%     1.9685   $      259,081   $      256,750   $     259,081   $      261,411   $        2,331     $   2,273
  2.550%     1.9425   $      262,548   $      256,750   $     262,548   $      268,347   $        5,798     $   5,513
  2.550%     1.9375   $      263,226   $      256,750   $     263,226   $      269,702   $        6,476     $   6,005
                                                                                         $       13,129     $ 13,791

Quarterly     FX                     Swap                   Hedged                           Estimated      12/31/02
forward     Forward       Receive            Pay             Cash                              Swap          Swap
  rates      Rate         Variable          Fixed            Flow           Net Effect       cash flow       Value

  2.550%     2.0000   $      255,000   $      256,750   $     255,000   $      253,250   $        (1,750) $       -
  2.550%     1.9985   $      255,191   $      256,750   $     255,191   $      253,633   $        (1,559) $       -
  2.550%     1.9875   $      256,604   $      256,750   $     256,604   $      256,458   $         (146) $       -
  2.550%     1.9825   $      257,251   $      256,750   $     257,251   $      257,752   $          501 $        -
  2.550%     1.9750   $      258,228   $      256,750   $     258,228   $      259,706   $        1,478 $        -
  2.550%     1.9685   $      259,081   $      256,750   $     259,081   $      261,411   $        2,331    $     -
  2.550%     1.9480   $      261,807   $      256,750   $     261,807   $      266,864   $        5,057    $   4,931
  2.550%     1.9325   $      263,907   $      256,750   $     263,907   $      271,064   $        7,157    $   6,805
                                                                                         $       13,068    $ 11,737

Quarterly     FX                     Swap                   Hedged                           Estimated     03/31/03
forward     Forward       Receive            Pay             Cash                              Swap         Swap
  rates      Rate         Variable          Fixed            Flow           Net Effect       cash flow      Value

  2.550%     2.0000   $      255,000   $      256,750   $     255,000   $      253,250   $       (1,750)   $     -
  2.550%     1.9985   $      255,191   $      256,750   $     255,191   $      253,633   $       (1,559)   $     -
  2.550%     1.9875   $      256,604   $      256,750   $     256,604   $      256,458   $         (146)   $     -
  2.550%     1.9825   $      257,251   $      256,750   $     257,251   $      257,752   $          501    $     -
  2.550%     1.9750   $      258,228   $      256,750   $     258,228   $      259,706   $        1,478    $     -
  2.550%     1.9685   $      259,081   $      256,750   $     259,081   $      261,411   $        2,331    $     -
  2.550%     1.9480   $      261,807   $      256,750   $     261,807   $      266,864   $        5,057    $     -
  2.550%     1.9275   $      264,591   $      256,750   $     264,591   $      272,433   $        7,841    $   7,646
                                                                                         $       13,753    $   7,646
                                                   Quarters
                                                  remaining    FVIF

                                                      1.00       1.0255    1.0255
                                                      2.00       1.0517    1.0255
                                                      3.00       1.0785    1.0255
                                                      4.00       1.1060    1.0255
                                                      5.00       1.1342    1.0255
                                                      6.00       1.1631    1.0255
                                                      7.00       1.1928    1.0255
                                                      8.00    1.223166     1.0255
0.0015968                            Swap Value                           #######




                                                      t        FVIF

                                                       -        1.0000
                                                      1.00      1.0255
                                                      2.00      1.0517
                                                      3.00      1.0785
                                                      4.00      1.1060
                                                      5.00      1.1342
                                                      6.00      1.1631
                                                      7.00      1.1928
0.0014803                = Sept. 30 Swap Value
            12/31/2001



                                                                 t        FVIF

                                                                   -       1.0000
                                                                   -       1.0000
                                                                  1.00     1.0255
                                                                  2.00     1.0517
                                                                  3.00     1.0785
                                                                  4.00     1.1060
                                                                  5.00     1.1342
                                                                  6.00     1.1631
 0.001165                = Dec 31 Swap Value
            3/31/2002



                                                                 t        FVIF
                                                    -   1.0000
                                                    -   1.0000
                                                    -   1.0000
                                                1.00    1.0255
                                                2.00    1.0517
                                                3.00    1.0785
                                                4.00    1.1060
                                                5.00    1.1342
0.001174                = Mar 31 Swap Value




                                                t       FVIF

                                                 -      1.0000
                                                 -      1.0000
                                                 -      1.0000
                                                 -      1.0000
                                                1.00    1.0255
                                                2.00    1.0517
                                                3.00    1.0785
                                                4.00    1.1060
0.001174                  #REF!    Swap Value
           9/30/2002


                                                t       FVIF

                                                    -   1.0000
                                                    -   1.0000
                                                    -   1.0000
                                                 -      1.0000
                                                 -      1.0000
                                                1.00    1.0255
                                                2.00    1.0517
                                                3.00    1.0785
0.001254                 9/30/2002 Swap Value
           12/31/2002


                                                t       FVIF

                                                    -   1.0000
                                                    -   1.0000
                                   -      1.0000
                                   -      1.0000
                                   -      1.0000
                                   -      1.0000
                                   1.00   1.0255
                                   2.00   1.0517
0.001297   12/31/2002 Swap Value




                                           t       FVIF

                                            -      1.0000
                                            -      1.0000
                                            -      1.0000
                                            -      1.0000
                                            -      1.0000
                                            -      1.0000
                                            -      1.0000
                                           1.00    1.0255
            #REF!    Swap Value
Warning: This file is best viewed in Excel software rather than in a web browser.
Sensitivity Analysis of Overhedging and OCI
Working Paper 288 Case on Foreign Currency Swap Valuation and Accounting
Foreign Currency Hedge of Fixed-Rate Interest-Bearing Foreign Debt at Varying Loan Rates




OCI Sensitivity Analysis Spreadsheet

When the 10.2% foreign currency swap leg remains constant, all of the hedged item's
loan rates above 10.2% result in underhedging some of the FX risk. However, when
the hedged item's loan rate is less than 10% there is an overhedging that will decrease
or increase earnings and create some earnings volatility.

When there isunder hedging, all changes in the swap's value are debited or credited to
Other Comprehensive Income (OCI). However, when there is overhedging, the change
in swap value due to overhedging must be charged to current earnings rather than OCI.

                                       10.2% Swap Receivable
                                          XZY Net          Swap's        Loss (Gain) Loss (Gain)
                                            Swap          Estimated         From        From
                                         Cash Flow           Value       Overhedge    Overhedge
                    07/01/01              ($4,587)         ($3,891)           $1,602       $1,221
                    09/30/01              ($3,648)          $4,996           ($3,659)     ($2,788)
                    12/31/01               ($146)           $5,972             ($402)       ($306)
                    03/31/02               $1,478           $9,770           ($1,564)     ($1,192)
                    06/30/02               $2,331          $13,791           ($1,655)     ($1,261)
                    09/30/02               $5,057          $11,737              $846         $644
                    12/31/02               $7,157           $7,646            $1,684       $1,283
                    03/31/03               $7,499             $0              $3,149       $2,399
                                       Overhedging Total =                       $0           $0
                      XYZ Loan Rate on DM20 Million Note =                    6.00%        7.00%


                                                                                                     The top line depicts th
$4,000
$2,000
     $0
($2,000)
($4,000)
 Loss (Gain) Loss (Gain) Loss (Gain)          Loss (Gain)   Loss (Gain)
    From        From         From                From          From
 Overhedge    Overhedge    Overhedge          Overhedge     Overhedge
        $839         $458          $0                  $0            $0
     ($1,917)     ($1,045)         $0                  $0            $0
       ($211)       ($115)         $0                  $0            $0
       ($819)       ($447)         $0                  $0            $0
       ($867)       ($473)         $0                  $0            $0
        $443         $242          $0                  $0            $0
        $882         $481          $0                  $0            $0
      $1,649         $900          $0                  $0            $0
          $0             $0            $0             $0           $0
       8.00%          9.00%        10.20%         11.00%       12.00%

  Overhedging Loss (Gain) Patterns
The top line depicts the eighth quarter and the
      bottom line is the second quarter.
Interest Rates --->
Warning: This file is best viewed in Excel software rather than in a web browser.
Sensitivity Analysis of Overhedging and OCI
Working Paper 288 Case on Foreign Currency Swap Valuation and Accounting
Foreign Currency Hedge of Fixed-Rate Interest-Bearing Foreign Debt at Varying Loan Rates




Change in Retained Earnings Resulting from a 10.2% Swap Receivable Hedge
                             10.2% Swap
                               XZY Net      Change in      Change in     Change in    Change in
                                  Swap       Retained       Retained      Retained     Retained
                              Cash Flow     Earnings       Earnings      Earnings     Earnings
         07/01/01               ($4,587)       152,918        177,640       202,362      227,084
         09/30/01               ($3,648)       152,532        177,346       202,159      226,973
         12/31/01                ($146)        151,090        176,247       201,404      226,561
         03/31/02                $1,478        150,421        175,737       201,054      226,370
         06/30/02                $2,331        150,070        175,470       200,870      226,270
         09/30/02                $5,057        148,947        174,614       200,282      225,949
         12/31/02                $7,157        148,082        173,956       199,829      225,702
         03/31/03                $7,499        147,942        173,848       199,755      225,662
                                            $1,202,001     $1,404,858    $1,607,715   $1,810,572
                     XYZ Loan Rate =             6.00%          7.00%         8.00%      9.00%

                                                                 Change in Retained Earnings as Inter
                                                                            Rates Increase

                                                   400,000
                                                   300,000
                                                   200,000
                                                   100,000
                                                            0




Amount of Underhedging or Overhedging Under the 10.2% Swap Receivable Hedge
                             10.2% Swap      Under or       Under or      Under or    Under or
                  XZY Net     (Over)       (Over)       (Over)       (Over)
                    Swap     Hedged       Hedged       Hedged       Hedged
                 Cash Flow   Amount       Amount       Amount       Amount
07/01/01          ($4,587)    (103,832)     (79,110)     (54,388)     (29,666)
09/30/01          ($3,648)    (104,218)     (79,404)     (54,591)     (29,777)
12/31/01           ($146)     (105,660)     (80,503)     (55,346)     (30,189)
03/31/02           $1,478     (106,329)     (81,013)     (55,696)     (30,380)
06/30/02           $2,331     (106,680)     (81,280)     (55,880)     (30,480)
09/30/02           $5,057     (107,803)     (82,136)     (56,468)     (30,801)
12/31/02           $7,157     (108,668)     (82,794)     (56,921)     (31,048)
03/31/03           $7,499     (108,808)     (82,902)     (56,995)     (31,088)
                             ($851,999)   ($649,142)   ($446,285)   ($243,428)
           XYZ Loan Rate =     6.00%          7.00%      8.00%        9.00%

                                               Underhedging and Overhedging a
                                                           Rates Increase

                                  100,000
                                   50,000
                                          0
                                  (50,000)
                                 (100,000)
                                 (150,000)
ble Hedge
            Change in    Change in    Change in
             Retained     Retained     Retained
            Earnings     Earnings     Earnings
               256,750      276,528      301,249
               256,750      276,601      301,415
               256,750      276,876      302,033
               256,750      277,003      302,320
               256,750      277,070      302,470
               256,750      277,284      302,951
               256,750      277,449      303,322
               256,750      277,475      303,382
            $2,054,000   $2,216,285   $2,419,142
              10.20%       11.00%       12.00%

tained Earnings as Interest
Rates Increase




                  Interest Rates --->




 Swap Receivable Hedge
            Under or     Under or     Under or
         (Over)    (Over)      (Over)
        Hedged    Hedged      Hedged
        Amount    Amount      Amount
            0        19,778      44,499
            0        19,851      44,665
            0        20,126      45,283
            0        20,253      45,570
            0        20,320      45,720
            0        20,534      46,201
            0        20,699      46,572
            0        20,725      46,632
           $0     $162,285    $365,142
         10.20%    11.00%      12.00%

ng and Overhedging as Interest
  Rates Increase




                    Interest Rates --->

				
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