Foreign Exchange Risk Management Options part 3

11 Comments
View all ACCA Paper P4 lectures >> This P4 lecture is based on OpenTuition course notes view/download here>>

Comments

  1. Avatar of toobaalvi toobaalvi says:
    May 5, 2013 at 3:48 pm

    Why do we convert the transaction at spot of 1.4100 when we are having the option and we can get the pounds at 1.4750?

  2. Avatar of gaya s. gaya s. says:
    April 10, 2013 at 6:22 pm

    Thank you to the tutor and Open Tuition for the wonderful lecture :)

    However I have a q on the premium part.
    The premium was initially established in $ and since the company in q is a UK company, the impact should be shown in Pound and thus the need for conversion to Pound arises. I understood that part. However why was the the conversion rate used $ 1.4850 (buying rate) and not $ 1.4870 (selling rate) since we are selling $ to receive pounds?

    Thank you once again for a good lecture :)

    • Avatar of Wahabna Wahabna says:
      April 28, 2013 at 11:51 pm

      Hey :) I understood your question. And its a good one btw :) What i believe is, since its a premium PAYABLE in dollars, we have to BUY dollars to pay for the premium. And therefore, in order to buy the dollars, we are using the Buying Rate (1.4850).
      So in short, we can say, we are selling 5556 pounds to buy 8250 dollars :) I hope i made sense :D

  3. Avatar of estherpang87 estherpang87 says:
    November 21, 2011 at 12:52 pm

    Hi Markn, Thanks for your explanation. I finally understand that the tutor said, when we exercise the option, we are actually claiming back $ from the option writer. So, the currency we hold now is $, we will sell $ to buy Pound. Therefore, buy rate of $1.4120 is used. Anyway, thank you so much.

  4. Avatar of markn markn says:
    November 21, 2011 at 10:44 am

    Hi Estherpang87, the reason he uses 1.4120 is because we are receiving the pounds to offset against the amount we are convering to pay the $1m. Some tutors always advise us to choose the rate in which we receive less or pay more – it’s just an exam tip. Always choose a rate that is unfavourable to you…

  5. Avatar of estherpang87 estherpang87 says:
    November 16, 2011 at 4:11 pm

    Hi sir, in this example, when we calculate the amount attributable to option exercised, our working is [22 x 31250 x (1.475 - 1.4100)] / 1.4120 = 31649 pound.

    In my opinion, the rate of 1.4120 is a buy rate. but in this case, we actually sell pound to buy $ to settle payment. Shouldn’t we use sell rate of 1.4100, instead of the buy rate of 1.4120?

    Thank you sir.

  6. Avatar of mtolessin mtolessin says:
    November 10, 2011 at 12:46 pm

    Dear Tutor, is it assumed that premium payable to bank in USD that’s why we are using buying ex.rate in this example? Thank you

  7. Avatar of wedson wedson says:
    May 16, 2011 at 10:30 am

    its realy hepful

Leave a Comment