Fuji Bank issued convertible Eurobonds in January 1989. Convertible bonds were a popular way for Japanese banks to raise funds while the Tokyo stock market was booming in the 1980s. The lure of capital gains from converting the bonds to equity allowed the banks to issue the securities with a very low interest rate.
Fuji Bank Eurobond was a 500-million Swiss franc zero-coupon bond, issued at par with a maturity of five years. A bond with a face value of 100 Swiss francs could be converted into two shares of Fuji Bank at any time starting in 1991. At time of issue, Fuji's stock was worth 3,590 yen, and a Swiss franc was worth 80 yen. The bond also had a put option that could be exercised at the start of 1991 (and only at that time). Bondholders had the option of redeeming the bond at a premium of 2.625% over its face value. In other words, bondholders could obtain 102.625 francs for each bond. On January 14, 1991, the Tokyo stock market and the yen dropped. A stock of Fuji Bank was worth
2,400 yen, and a Swiss franc was worth 95 yen. Yields on Swiss franc bonds were around 4%. Most bonds were presented for early redemption.
a. Why was it advantageous for a bondholder to exercise the put option?
b. What was the total yen loss for Fuji Bank?

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The Answer of Fuji Bank issued convertible Eurobonds in January 1989. Convertible bonds were a popular way for Japanese banks to raise funds while the Tokyo stock market was booming in the 1980s. The lure of capital gains from converting the bonds to equity allowed the banks to issue the securities with a very low interest rate.
Fuji Bank Eurobond was a 500-million Swiss franc zero-coupon bond, issued at par with a maturity of five years. A bond with a face value of 100 Swiss francs could be converted into two shares of Fuji Bank at any time starting in 1991. At time of issue, Fuji's stock was worth 3,590 yen, and a Swiss franc was worth 80 yen. The bond also had a put option that could be exercised at the start of 1991 (and only at that time). Bondholders had the option of redeeming the bond at a premium of 2.625% over its face value. In other words, bondholders could obtain 102.625 francs for each bond. On January 14, 1991, the Tokyo stock market and the yen dropped. A stock of Fuji Bank was worth
2,400 yen, and a Swiss franc was worth 95 yen. Yields on Swiss franc bonds were around 4%. Most bonds were presented for early redemption.
a. Why was it advantageous for a bondholder to exercise the put option?
b. What was the total yen loss for Fuji Bank?

Fuji Bank Issued Convertible Eurobonds in January 1989