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Interest-rate Swap Offered by Sumitomo-Mitsui Bank: Was This for Hedging or Speculation?  
 
Product Ref: 16/586C Company: Sumitomo-Mitsui Bank

Product Type: Case Industry: Investment Banking and Brokerage

Related Product(s): Teaching Note
Authors: Mitsuru Misawa   
Sumitomo-Mitsui Bank (the Bank) was found not to have breached its duty of explanation when an interest-rate swap agreement had been executed between the Bank and a customer (the Company), under which fixed and floating interest rates would be swapped and the resulting difference settled. The Company had borrowed substantially at floating-rate interest and wanted to hedge against the risk associated with rising interest rates. During the period from June 8, 2005 to June 7, 2006, the Company paid óD8.8 million in total to the Bank as the difference between the fixed interest rate and the floating interest rate, and penalty interest payments due to delay. The Company then sued the Bank and asserted that it had breached its duty of explanation, abused its superior bargaining position, and inappropriately and unfairly solicited this agreement with the Bank. The Company had a basic question as to whether this swap was for hedging or speculation, and claimed that the Bank had not fully explained the product and the risk involved. A full economic analysis of this derivative for this case study was included so that it can be employed to assess the court decision
Functional Area : Finance & Investments

Learning Objective: Students will learn about the critical thinking skills that top management must possess to make important business decisions about hedging. Students will learn how important it is to present economic analysis during court cases involving financial derivatives. Students will also learn how to construct interest-rate swaps with actual data by studying the exercise questions given below.
Length: 15 pages Country: Japan

Pub. Year: 2017 Level of Difficulty: 3
         
This product type is available in the following language(s):      English
         
Related Information: N/A
 
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