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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?
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