Banc One Corporation Case Solution
Banc One Corporation is a well-known banking company, which works on three-tiered structure, different form other parent companies’ structures. The bank has an approximate of $76.5 billion in assets, and the location of the bank is in Ohio. Since the early period after its beginning; the company acquired many banks and increased its number of banks on an annual basis for the soul purpose of increasing its volume. It is a decentralized organization which has heavily invested in the information technology and has been dedicating in providing its investors with profit as well as increased revenues. Additionally, its usage of swaps for its financial projections creates hurdles for the bank and has a high potential to decrease its current stock price.
For an effective management of its as sets as set/ liability, banc one uses derivatives; – a new financial instrument, which provides the bank with the decreased stock prices. The bank’s profit statement shows an increasing trend because of the usage of derivatives portfolio, and its strategy of swaps position. It has become difficult for the investors to analyze the real risks associated with the company and its profits, which mitigates the investors to pin point the exact cause of the decrease of 10$ in the company’s stock price. McCoy and Lodge have to deal with this intense problem.
A detailed situational analysis has been performed in order to cope up with this intense situation for the purpose of satisfying its investors.
Banc One Without Swaps
A detailed analysis has been performed to analyze the company’s profitability without using derivatives and swaps. Swaps help the company to generate more revenues by receiving a fixed interest income. If the company would not use derivatives and swaps interest rate then liquidity and other financial ratios will definitely get effected and would show lower revenues as compared to the current revenues. If the company does not want to work on the basis of swaps; it must work and analyze its projections on the competitive market forces. The company must use the market interest rate for its lending and borrowing activities, without which there could be uncertainties in terms of interest income generated from interest payments.The company should function on the basis of liquid sensitive rather than earning sensitivity by capturing more liquidity terms.(Larry D. Wall and John J. Pringle, 1989) (See appendix)
Pros and Cons Swap Using
There are number of benefits associated with swap interest rate along with some associated risks:
Pros of Using Swaps
It has numerous benefits such as hedging effect and interest rate benefits. It generates increased revenues because of fixed interest revenue. The company’s revenues would be affected by its payment schedule because it will have to pay floated rate, which may be lower than the market competitors and provides the company with increased revenues.
Cons of Using Swaps
It has also some associated risk that should be controlled on timely basis. Floating interest rate are un-predictable and uncertain, which creates huge risks in term of revenues for both the parties…………
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