World Tours, Inc.

1
World Tours, Inc.

• Cash Management Swaps
• Mike de Graaf
• Mike Messenger
• FINA 7360 11/13/02

2
Objective

• To deseason World Tour Inc.s cash flows, which
  are subject to the high season in the winter (Q1)
  and summer (Q3), and the low season in the spring
  (Q2) and fall (Q3).
• WTI plans to issue debt to investors, so needs
  financials that are less volatile and more stable
  in order to attract investors.

3
Methodology

• Use statistical decomposition to determine values
  of the revenue and profit components.
• Apply swap deals in order to even out the
  quarterly cash flows (increase low season cash
  flows while decreasing high season cash flows).
• Use fixed to fixed interest rates.
• Adjust notional principles to take into account
  growth in revenues and profits (a.k.a accreting
  fixed-for-fixed interest rate swap).
• Utilize different swaps to obtain the best
  possible fit in order to smooth out quarterly
  cash flows.
• Adjust quarterly cash flows using cash flows
  derived from swap.

4
Statistical Decomposition

• Revenue Trend Seasonal ECI Factor Random
• Trend 1200 (200 x Period)
• Seasonal 0.2 x D x Trend
• ECI Factor 0.6 x (ER 2.0) x Trend
• Where
• Period Quarter number (1 through 24)
• D Seasonal dummy (1 for Q1 and Q3, -1 for Q2
  and Q4)
• ER Exchange rate of ECI for domestic currency
• Profit
• Before Tax Profit (15 - 7) x Revenue
  160,000 DCU
• Where

5
Swap Construction
Year T
Payable (Q1, Q3)
World Tours
Swap Dealer
Receivable (Q2, Q4)
6
Pre-Swap Data
7
Post Swap Data
8
Decomposition of Revenue
9
Decomposition of Revenue
10
Decomposition of Revenue - Comparison
11
Profit Option 1
Notional Principle (NP) adjusted using growth
rate of trend
12
Profit Option 1
13
Swap Schedule for Profit Option 1
Year 1
Year 4
61.74
148.90
World Tours
Swap Dealer
World Tours
Swap Dealer
61.74
148.90
Year 2
Year 5
90.80
177.94
World Tours
Swap Dealer
World Tours
Swap Dealer
90.80
177.94
Year 3
Year 6
119.84
207
World Tours
Swap Dealer
World Tours
Swap Dealer
119.84
207
14
Profit Option 2
Notional Principle (NP) adjusted using graphical
best fit
15
Profit Option 2
16
Swap Schedule for Profit Option 2
Year 1
Year 4
48.40
118.54
World Tours
Swap Dealer
World Tours
Swap Dealer
48.40
118.54
Year 2
Year 5
79.02
169.90
World Tours
Swap Dealer
World Tours
Swap Dealer
79.02
169.90
Year 3
Year 6
122.48
160.02
World Tours
Swap Dealer
World Tours
Swap Dealer
122.48
160.02
17
Profit Option 3
After swap revenues and profits calculated with
post-swap adjusted cash flows (for the seasonal
and ECI factor components)
18
Profit Option 3
19
Swap Schedule for Profit Option 3

• Combine swap schedules for both the seasonal and
  ECI factor components.
• Then calculate revenue and profits from adjusted
  post-swap cash flows of the individual components.

-
20
Trend Component
21
Trend Component
22
Seasonal Component
Notional Principle (NP) adjusted using growth
rate of trend
23
Seasonal Component
24
Swap Schedule for Seasonal Component
Year 1
Year 4
680.06
1640.12
World Tours
Swap Dealer
World Tours
Swap Dealer
680.06
1640.12
Year 2
Year 5
1000.08
1960.14
World Tours
Swap Dealer
World Tours
Swap Dealer
1000.08
1960.14
Year 3
Year 6
1320.10
2280.18
World Tours
Swap Dealer
World Tours
Swap Dealer
1320.10
2280.18
25
ECI Factor Component
Notional Principle (NP) adjusted using graphical
best fit
26
ECI Factor Component
27
Swap Schedule for ECI Factor Component
Year 1
Year 4
37.04
98.78
World Tours
Swap Dealer
World Tours
Swap Dealer
37.04
98.78
Year 2
Year 5
24.70
216.08
World Tours
Swap Dealer
World Tours
Swap Dealer
24.70
216.08
Year 3
Year 6
75.08
49.40
World Tours
Swap Dealer
World Tours
Swap Dealer
74.08
49.40
28
Random Component
Notional Principle (NP) adjusted using growth
rate of trend
29
Random Component
30
Swap Schedule for Random Component

• No swaps to be done
• Ineffective at smoothing out curve
• Random component considered negligible
• Random component inherent and unpredictable

31
Profit Options Comparison
Profit Option 2 appears to have the best fit and
smoothest curve
32
Swap Dealer Profit
33
Currency Swap Construction
Year T
Payable (Coupon)
World Tours
Swap Dealer
Receivable (ECI)
34
Currency Swap Data
35
Currency Swap
36
Profits Currency vs. Interest Swap
37
Conclusion

• The interest rate swap was effective in smoothing
  out profit curves. However, it was ineffective
  for some components (e.g. Trend and Random) and
  was less effective in smoothing out the ECI
  factor.
• The currency swap, however, was effective in
  smoothing out the ECI factor and the overall
  profit curve.