I have a doubt in example 7 if you could help.
In our first step when we had deposited “7,8874,016”, we had bought this amount of dollars from bank(am not sure if we buy from bank, but in lecture you said we buy the dollars and deposit them for 3 months), then we convert $ to pound after that we borrow the converted amount for 3 months. Now in 3 months time firstly we need to repay our borrowings of “4980494” and the customer will get $8M from our deposits.

As per this haven’t we paid twice? Once while buying the $ for depositing(which in turn customer will get) and secondly we will also need to repay the borrowings.

Okay, I think I got it, let me know if am wrong : We are basically calculating the amount that we need to borrow in the first step which is in dollar and then converting it into pound to get how much we need to borrow to deposit in the first step.

When we see a spot let’s say $/£ 1. 5384 – 1.5426 does it mean that £1 = $1. 5384 – $1.5426 sell or buy …. Having difficultly selecting the right rate everytime

The way I understand it is if we have an asset (which will be money coming in in 3 months time, we have to create a liability in the currency we will be receiving…..eg if we are expecting a payment 0f 300,000 pounds and we are in the US….if the pounds interest rate (borrowing) is 15% pa….we are going to borrow 289156.63…..(15/12 multiply by 3 = 3.75% – which is .0375 —-( 300,000 pounds divided by 1.0375 = 289156.63). We then convert to US at the spot rate and deposit for 3 months at the US deposit rate. At the end of the 3 months, we are owing exactly 300000 pounds.

priyanka says

Hello John,

I have a doubt in example 7 if you could help.

In our first step when we had deposited “7,8874,016”, we had bought this amount of dollars from bank(am not sure if we buy from bank, but in lecture you said we buy the dollars and deposit them for 3 months), then we convert $ to pound after that we borrow the converted amount for 3 months. Now in 3 months time firstly we need to repay our borrowings of “4980494” and the customer will get $8M from our deposits.

As per this haven’t we paid twice? Once while buying the $ for depositing(which in turn customer will get) and secondly we will also need to repay the borrowings.

priyanka says

Okay, I think I got it, let me know if am wrong : We are basically calculating the amount that we need to borrow in the first step which is in dollar and then converting it into pound to get how much we need to borrow to deposit in the first step.

John Moffat says

That is correct

beautyashma says

In example 7 I do not understand why 1.6201 was used instead of 1.6283. Since we are buying dollars wouldn’t it cost me less pounds.

I hope my question is understandable

beautyashma says

When we see a spot let’s say $/£ 1. 5384 – 1.5426 does it mean that £1 = $1. 5384 – $1.5426 sell or buy …. Having difficultly selecting the right rate everytime

John Moffat says

If you watch the first lecture on foreign exchange risk management, I spend a long time explaining which exchange rate to use, and why.

aurore says

Hello,

I seem to be having an issue with the spot rate to choose.

In this example, don’t we need to sell dollar when calculating the (now)value in pounds?

Please do advise me. I did get previous work examples right so I am a bit confused here.

John Moffat says

You do not say which of the examples in this lecture you are referring to!!

In the first example, we want to put $’s on deposit and so we need to buy $’s now in order to be able to.

aurore says

Ah ok. I’ve got it.

It was example 7. sorry.

Thank you very much!

sajlasalisbeajar says

can u explain about futures ?

John Moffat says

I can and I do!!!

Why don’t you watch the remaining lectures on foreign exchange risk

Salauddin says

I did not find the exam question in the lecture notes. could you please help me to find?

John Moffat says

The first example is Example 7 on page 126 of the Lecture Notes.

The second one is an old exam question that I am afraid is no longer available on the ACCA website.

jeffrey says

where is the exam question that u did in the video lecture plz?? i cant find it in the lecture notes!!

John Moffat says

That is correct, although I do not know why you have typed this

It is just repeating what is in the lecture.

claudia1 says

The way I understand it is if we have an asset (which will be money coming in in 3 months time, we have to create a liability in the currency we will be receiving…..eg if we are expecting a payment 0f 300,000 pounds and we are in the US….if the pounds interest rate (borrowing) is 15% pa….we are going to borrow 289156.63…..(15/12 multiply by 3 = 3.75% – which is .0375 —-( 300,000 pounds divided by 1.0375 = 289156.63). We then convert to US at the spot rate and deposit for 3 months at the US deposit rate. At the end of the 3 months, we are owing exactly 300000 pounds.