1. GILLETTE / GE – CASE STUDY

2. Agenda
Swaps
Case Study
Financial Accounting Standards Board

3. Swaps
A swap is a contract between two counterparties in which each agrees to pay the other’s stream of payments on their respective debt issues.
The principal amounts are generally equal and are referred to as notional principal.
Types include:
interest rate swaps
coupon swaps
currency swaps
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4. Swaps
Interest rate swaps are arrangements whereby parties swap interest payments on their debt issues
In a coupon swap, one counterparty pays the other party the fixed-coupon rate, and the other pays the coupon rate on a floating instrument
A currency swap is a pair of simultaneous spot and forward transactions in which the forward transaction unwinds the spot transaction

5. Case Study
In 1999 Gillette financed its European operations by raising money through a Eurobond instead of using a swap option
Costs of about € a year
GE issued €250 million in Eurobonds and also had high costs
Reasons? Accounting rules of the Financing Accounting Standards Board

6. Case Study
FASB 133 forces companies to report the fair market value of their derivatives in the balance sheets
Consequently, Multinational Companies such as GE and Gillette prefer to pay high funding costs instead of facing balance sheet and income volatilities

7. Financial Accounting Standards Board
American privat, not-for-profit organisation
Designed by the SEC in 1973
Purpose is to develop generally accepted accounting principles (GAAP)
Rules have been critized heavily by the Multinationals