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Hello John,
Could you help me with the Q53 Washi?
In the appendix 1, we’re asked to estimate the receivable under each hedge choice, why does the answer use future price plus 1/7*(129.2-125.2) as the expected price instead of using future price minus 1/7*(125.2-129.2)? Is it because the future is 7 months but Washi will only invest for 6 months?
Also, when calculating the NPV in appendix 2, why do we need to deduct the additional tax payable to calculate the net cash flows, but we don’t have to do this in Q50 Yilandwe and Q52 Chmura? They all mentioned the bilateral tax treaty in the question.
Many thanks in advance!
Yes. The futures expire in 7 months time but the futures deal will be closed in 6 months time. So the unexpired basis is 1/7 of the difference between the current futures price and the current spot rate.
I do explain this in detail in my free lectures on foreign exchange risk management.In Washi the tax rate in Japan is 30% but in Airone the rate is 15%. Therefore there is an extra 15% tax charged in Japan on the profits of Airone.
For Yilandwe, the tax rate in the US of 20% is lower than the tax rate in Yilande of 40%, so there is no extra tax payable in the US.
For Chmura, Chmura’s tax rate is 20% which is lower than the rate in Mehgam of 25%, so again there is no extra tax payable by Chmura.
This is the normal tax rule when there is a double tax treaty (and I explain it in my free lectures on foreign investment appraisal). In Paper AFM foreign investment questions there is always stated to be a double tax treaty.(You can find lectures working through the whole of the question Chmura, linked from the following page:
https://opentuition.com/acca/afm/afm-revision-lectures/ )Thank you so much for the detailed explanation.
I did go through few lectures last week, I’ll go back to it for revision.
Have a nice day!
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