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Hi Sir,
1) There is a note in the scenario that the “HK dollar pegged against US dollar”, could you please explain what does it mean and why we should therefore create cross rate, convert HK dollars to US dollars and then net it with 320 000$ US payment of UK company to US company?
2) As we need to create cross rate we need HK$/pound divide by US$/pound.
As far as I understand UK company is receiving cash from HK company so UK company will sell HK$ and therefore we take 11,2050 (greater) rate but as we creating cross rate we also take 1.4358 rate.My second question is why we are taking lower 1.4358 rate? If we expect to receive and sell foreign currency we normally take greater rate which is in our case 1.4366. Could you please tell the rule which rates we should take when we create cross rates.
Thank you in advance.
Pegging means that the exchange rate for the HK dollar is kept fixed against the US dollar.
So the risk of the $HK/GBP exchange rate changing is the same as the risk of the $US/GBP exchange rate changing.
Since 11.1987 HK$’s = 1GBP, and 1GBP = 1.4358 US$’s, it means that 11.1987 HK$’s = 1.4358 US$s. Therefore (11.1987/1,4358 HK’s) 7.8 HK$’s = 1 US$
(or, similarly, 11.2050/1.4366 = 7.8 HK$’s is 1 US$ )So to work out the peg it doesn’t matter which of the two rates you take (as long as they are both the lower, or both the higher). The HK$/US$ exchange rate is 7.8 whichever way 🙂
Thank you for clarifying but:
1) I now understood that if we use cross rate the risk of $HK/GBP would be the same as the risk of the $US/GBP (only in case if we use cross rate, because we convert $HK to $US). But why we just not to convert $HK to GBP directly without any cross rates? Risk would be different? If yes why do not we accept that risk?
2) I got that both rates should be lower or higher (both bid rates or both ask rates) but BPP answer is 11,2050/1,4358 = 7.8040 Where 11.2050 is higher rate and 1.4358 is lower rate. So BPP answer is not correct right?
1. But the question wants you to hedge the risk. Money market hedging and options are not available for the HK$
2. BPP do not have this question in their current Revision Kit and so I can’t comment on what they have done. I have done what the examiner did in his answer.
John, do not you know where can i get SFM past exams questions and answers? BPP answer for options seems confusing to me, I would like to see the examiner answer
I only have it because it is saved on my computer.
The ACCA still have them on their website, but they do not index them. Try searching with Google – something like ACCA P4 Dec 2002. That might find it.I contacted ACCA via chat, they could not provide me with jun 2002 exam and answer, in google i could find questions only starting from dec 2002, would you like to share june 2002 exam and answers with me?)
- The topic ‘BPP, NTC (SFM, 6/02) – What is pegging and how to create cross rate properly?’ is closed to new replies.