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May 18, 2016 at 2:48 pm
Dear Sir, I’ve gone through the questions and answers in case similar questions to mine were already asked and resolved, my question is partly similar to Sam and I refer to your comment on 08 May 2014 regarding example 7. Before coming to my question, i’d like to sum up abit. In example 6, there was a receivable in $ and we did the following which perfectly makes sense:
1. Borrow $ NOW
2. Convert to £ at today’s rate
3. Deposit £
In example 7, There’s a payable in $, but we changed the sequence of the above
1. Deposit $ NOW
2. Convert to $ to £ at today’s rate
3. Borrow £
I have 3 questions regarding this:
a) if the 1st step is to deposit $, from where does the company get that money? ( Does it already have it in hand?) if yes then they could very well convert £ to $ at today;s rate and deposit $ at a fixed rate, why the borrowing afterwards.
b) Assuming the company does not have the cash in hand, will it be sensible if we go exactly as per eg 6. We borrow to have the money first(in $), then we convert to £ and deposit to receive fixed interest. The reason i’m asking this is because if the company does not have cash how will it be able to make a deposit at the place prior to a borrowing.
c) In the exam, we assume the company is always UK based unless otherwise stated, correct?
John Moffat says
May 18, 2016 at 3:32 pm
The steps you have listed are correct, and in example 7 we do need to borrow GBP first in order to be able to convert to $’s in order to be able to deposit $’s.
However, you cannot calculate how many GBP you need to borrow, without first calculating how many $’s you need to invest. So as far as the calculations are concerned, we need to perform them in the order listed.
(I do suggest that you watch the lecture again, and think about what I have just written)
The question will always tell you what currency the company is using.
May 18, 2016 at 4:47 pm
ok thank u sir
May 22, 2016 at 6:07 am
For example 7, are we borrowing the money in 3 months or are we borrowing the money now and re-paying in 3 months?
April 3, 2016 at 6:48 pm
Dear John, I have a question. Its a simple one, but i am not been able to answer it myself. When converting $ 7,874,015 to Pounds. Why did you use the rate 1.6201 instead of 1.6283. As i recall your theory when we have to convert to pound we will use the rate which will give us the fewer pounds. Because bank makes the profit. So in this case we should use 1.6283 because it will give us fewer pounds. Please explain
April 4, 2016 at 6:36 am
Because we are buying dollars and therefore paying our pounds. Using the lower rate means it costs us more pounds.
December 7, 2015 at 6:28 am
In Example 7 why did we need the third step when we calculated the amount in dollars that we need to borrow and converted that into pounds at the spot rate so effectively we have avoided the risk of any future exchange rate movements.
You say that to avoid any payment of pounds today but we don’t have to pay today anyways.
December 7, 2015 at 7:11 am
In Example 7 they are not borrowing dollars – they are depositing them.
They need to buy dollars today in order to be able to deposit them. That means paying out pounds now in order to pay for the dollars.
Rather than pay out pounds now (when otherwise they wouldn’t be paying the supplies for 3 months) they borrow the pounds now and only repay in 3 months.
November 16, 2015 at 8:22 pm
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.
November 16, 2015 at 8:34 pm
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.
November 16, 2015 at 9:21 pm
That is correct 🙂
October 15, 2015 at 11:44 pm
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
October 15, 2015 at 11:57 pm
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
October 16, 2015 at 9:11 am
If you watch the first lecture on foreign exchange risk management, I spend a long time explaining which exchange rate to use, and why.
May 2, 2015 at 10:54 pm
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.
May 3, 2015 at 10:42 am
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.
May 9, 2015 at 8:39 am
Ah ok. I’ve got it.
It was example 7. sorry.
Thank you very much!
April 30, 2015 at 8:42 am
can u explain about futures ?
April 30, 2015 at 8:52 am
I can and I do!!!
Why don’t you watch the remaining lectures on foreign exchange risk 🙂
April 22, 2015 at 7:23 pm
I did not find the exam question in the lecture notes. could you please help me to find?
April 22, 2015 at 8:20 pm
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.
April 21, 2015 at 8:42 pm
where is the exam question that u did in the video lecture plz?? i cant find it in the lecture notes!!
December 1, 2014 at 8:50 pm
That is correct, although I do not know why you have typed this 🙂
It is just repeating what is in the lecture.
December 1, 2014 at 8:28 pm
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.
November 29, 2014 at 11:38 am
where is the question which u are answering sir
November 29, 2014 at 11:40 am
i have bpp exam kit
August 23, 2014 at 7:17 pm
I wanted to ask question but I was even confused on what to ask. By seeing this lecture and I am relating to pilot example.
Kindly let me know why you have divided the $300 000 / 1.7850, why not to multiply?
The other thing is that we are recieiving so it should be worst case for us, so why you didn’t take 1.7842?
This topic of risk management seems to be most tricky, not difficult.
August 23, 2014 at 7:35 pm
1.7850$’s are equal to 1 £.
So to convert $300,000 to £’s, we need to divide by 1.7850.
Think about it – surely if it takes nearly $2 to get 1£, then the equivalent number of pounds must be less that the equivalent number of $’s!
We are receiving – yes – but if we divided by the lower rate then we would receive more! That cannot be the case 🙂
August 23, 2014 at 4:22 pm
which question you referring to after example7?? man I am getting mad!
August 23, 2014 at 5:36 pm
It is from the pilot paper. It is no longer available on the ACCA website, but if you say which Revision/Exam Kit that you have, then I will tell you where it is there.
May 27, 2014 at 8:51 pm
No we didn’t have the $’s already. If we already had them then there would be no point in any of it!!!
We need to buy $’s. If we want we can simply wait 3 months and buy them, but there is then the risk of the exchange rate having changed.
To avoid it we buy the $’s now at todays exchange rate.
How can we afford to buy them? We borrow £’s now so that we can afford to buy the $’s.
Now we have the $’s, but there is no point in paying the supplier immediately. So….we put them on deposit and pay him in three months.
May 27, 2014 at 8:56 pm
now it’s all clear, cause if you looked at comments by claudia1 and hamzaharoon, they also thought that company has the $’s already and that what confused me.
anyway, thank you very much indeed for your help
May 27, 2014 at 8:58 pm
You are welcome 🙂
May 27, 2014 at 11:41 am
Hi Mr John,
Sorry for asking about the same point that claudia1 and Hamzaharoon did ask about before
but what I understood from your lecture and your answer to their question is that:
yes we’re actually depositing and converting, but the whole idea of borrowing is to use this money for other investment purposes and not lose the chance of using the money deposited to pay out the supplier’s debt!, do you get what mean !?
Again, In example 7 question, why is it mentioned that “current 3 month interest rates” if the rates are yearly! or is it just to trick us !?
May 27, 2014 at 5:43 pm
I am not sure I understand what you mean. If there were other investments and we needed money, we could always borrow the money anyway.
The whole point of borrowing and depositing is so that the eventual cash flow ends up at the same time as it would if we didn’t do any hedging at all, or if we used forward rates.
We can then compare the eventual cash flow for money markets with the eventual cash flow if we used forward rates,
With regard to ‘3 month interest rates’. Interest rates are always quote in the exam as yearly interest rates. However, the bank will offer (or charge) different yearly rates depends on how long the deposit (or borrowing) is for. For example, if you are borrowing for 3 months they might charge at the rate of 10% p.a., but if you were borrowing for 6 months they might charge 12% p.a.. This is what happens in real life.
(However, they will only actually charge it for 3 months or for 6 months. So if you are borrowing for 3 months and they are charging 10% p.a., the actual interest charged will be 3/12 x 10%)
May 27, 2014 at 6:31 pm
the main point that confuses me is that in example 7, we are:
1_ depositing (this means we have the $’s already and we have deposited them for 3 months)
2_ Converting: to see how many £’s are they.
3_ Borrowing: which I couldn’t get the point of it as we have the money already and they are deposited so why would we be bothered to borrow more money and pay extra cost of interest when we have the $’s in the first place !!
if the sequence were like example 6 (Borrowing, converting and depositing) then there would be no problem in terms of “justifying the purpose of each step”. while “depositing, converting-which takes place now- and then borrowing” didn’t get through and it seemed to me pointless to borrow more money!
with regards to the “three months rate” it is now clear.
many thanks Mr John
October 29, 2013 at 10:42 pm
October 9, 2013 at 7:02 am
Hello John! Trying to understand where the deposit came from! Is it that instead of paying the money early (they had the money in hand) it was deposited to earn an interest? In step (2) was the conversion purely theoretical to ascertain the present value of the deposit converted into pounds and then that amount is borrowed now for 3 mths in pounds. In 3 months the $ deposit matures to 8 m and this is used to pay debt! What about the amount borrowed in pounds?
May 7, 2014 at 4:37 pm
Sir I Do have the same question which Claudia asked! Please do Explain I also cannot understood why we borrow at step 3 and why we invest at step 1? Do we have Cash in hand at firs? I Understood the Previous question but not this one I am Confused!!!Please Explain 🙁
May 8, 2014 at 6:34 am
Please ask questions in the F9 Ask the Tutor Forum if you want me to answer – I cannot always read the comments under lectures because there are so many.
I assume you are asking about example 7.
The whole idea of money market hedging is to convert money today at todays spot. There is no point in converting money now and paying the supplier immediately because payment is not required until 3 months from now.
So…..we borrow £’s now, convert now at spot to $’s, and then deposit the $’s for 3 months to earn interest.
However, there is no point in buying $8M dollars now because in 3 months time it will have earned interest and we will have more than we need.
So we calculate how many we need to deposit so that it will have grown to $8M in the 3 months.
Having calculated it we then pay £’s to buy that many $’s.
Instead of having to pay out £’s now (when otherwise we would not be paying out until 3 months from now) we borrow £’s for 3 months.
So…..the net cash flow now is zero (we borrow, convert, and deposit). The only real cash flows are in 3 months time – we pay out £’s to repay the borrowing, and the $ deposit matures and pays off the supplier.
The actual cash flows occur in 3 months time (just as they would have done if we had made a direct payment in 3 months) but it is a fixed amount – what happens to the exchange rate in 3 months is completely irrelevant.
(Claudia says that the conversion is theoretical – not at all. We borrow, we actually convert, and we deposit.)
November 23, 2012 at 3:55 pm
guys can you help me pls. None of the lectures work for me, it says that the opentution server is not available
November 23, 2012 at 6:37 pm
Your PC or network is behind a firewall
Please contact your Internet provider to help you
October 24, 2012 at 6:35 pm
In the middle of the Lecture, the person starts discussing a exam question on Money Market Hedge and Forwards, does anyone know where does he get that question from? I couldn’t find it in the relevant class notes.
October 24, 2012 at 6:42 pm
@DLS, Ok found it, its from F9 Pilot Paper.
October 21, 2012 at 7:02 pm
cant view the full lecture. The video stops playing. Any help??
July 14, 2012 at 4:30 pm
where is the exam question? the one moffet is doing?
July 14, 2012 at 4:34 pm
@atiq422, It is question 2 of the Paper F9 pilot paper.
June 2, 2012 at 7:58 pm
sir where can i find the pilot paper?
July 14, 2012 at 4:35 pm
@sweety22, You can download it from the ACCA website
May 23, 2012 at 7:50 pm
Hi mr. moofatt isn’t the 1month receipt fiqure $240,000.00
May 2, 2012 at 7:11 pm
is not forward rate you used not wrong, i thought it is meant to be 1.7850+0.0004=1.7854. are you then not meant to say $300 000/1.7854?
May 2, 2012 at 8:07 pm
@gracetsiga1, No – the forward rate is 1.7846 + or – 0.0004
So the relevant rate in this example is 1.7846 + 0.0004 = 1.7850
May 2, 2012 at 8:08 pm
@gracetsiga1, The example is question 2 of the F9 Pilot paper.
May 2, 2012 at 7:00 pm
Which past paper are you using Mr Moffat please?
April 20, 2012 at 6:34 pm
where is the source of examiners question please?
May 2, 2012 at 8:09 pm
@abiw2012, The question is example 2 of the F9 pilot paper.
December 8, 2011 at 9:44 am
which ppr is this Qs from???
December 1, 2011 at 5:07 pm
December 1, 2011 at 3:17 pm
Awesome explanation and its made so clear…thanks…
December 1, 2011 at 8:05 am
The audio isn’t synced properly with the audio, but hey ! its free and it’s great !
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