You are a Banking Consultant to the Bank of Tokyo, In Japan. One of the Bank’s c

Question

You are a Banking Consultant to the Bank of Tokyo, In Japan. One of the Bank’s clients, a young undergraduate student in Finance at a major University in Japan, is asking for an unsecured loan from Bank of Tokyo to invest in a unique business venture called “Yen-Carry Trade”. In his Business plan, the Client states that he had studied the theory and practice of this, and historically it had been a very profitable venture giving a return of 40%. He plans to invest the equivalent of $10,000 and borrow $90,000 from Bank of Tokyo at an annual interest rate of 1%. He plans to return the money in 1 year. The Bank has asked for your comments on this Business plan. What would you recommend?

Explanation / Answer

Firstly, historical returns are not guarantee of future returns

Secondly, it is only a matter of time when these types of trades-arbitrage will be exploited by other traders/algorithms. And when it does, abnormal profits would cease to exist.

Hence, I wouls recommend not to provide the loan because there ia no collateral provided and the future cash flows are not certain raising a question on loan repayment ability.

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