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Sir,if we are to pay the supplier in 6 months time,then we first DEPOSIT then CONVERT and then BORROW right?
Cz in the Qs PKA(12/07) the bpp kit has started from Borrowing..,pls helpYou have to calculate how many dollars you are going to deposit first (so that you will have enough, when interest is added on, to pay the supplier). In this question it is $245,700.
When you know how much you need to deposit, then you can buy the dollars at todays spot. In this question it will mean paying EUR 123,096.
When you know how many euros this will cost, you borrow those euros. You then repay the borrowing, with interest, in 6 months time (in this question it will mean paying EUR 126,850 in 6 months time).
I do not have the BPP answer – maybe they set it out differently, but the final answer will have to be the same as the above. (Certainly the examiners own answer set it out the way that I have done and came to the same figures 🙂 )
Thanks sir 🙂 i appreciate the explanation .
But while converting,wont we convert the deposit into Euros?No. The deposit is there so that it will provide dollars in 6 months time (when the deposit matures) so that we can use the dollars to pay the supplier in dollars.
Since we are in Europe, we had to use euros to buy the dollars (to put dollars on deposit) and so rather than have to pay out euros sooner, we borrowed the euros.
It means that the only actual cash flows occur in 6 months time – the dollar deposit matures and so we have enough dollars to pay the supplier, and we have to repay the euro loan in euros.
The end result is that in 6 months time we pay out a fixed amount of euros, and the supplier receives dollars.
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