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Foreign exchange risk management (1) Part 1 – ACCA (AFM) lectures

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  1. Sir honestly thank you so much for this lecture. You absolutely solve one of my great problem i.e. which exchange rate to use when converting the currency by giving a simple trick i.e.
    1. Use lower rate if buying 1st currency.
    2. Use higher rate if selling 1st currency.

    I would really appreciate if you explain in the same easy one of my confusion i.e.
    I got which rate to use and when, and hence I used to choose the right rate using your strategy but get it wrong while dividing or multiplying. I mean that I don鈥檛 get that when to multiply or when to divide?

    • Sir resolved this mystery.
      The easy way to tackle is that if we needs the figure in the stronger currency , so we always needs to divide the smaller currency by the exchange rate and vice verse.

      I do have posted one question on the ask the tutor forum and would appreciate your response to that question.

  3. Hi Sir,

    First of all, thank you for the video. I am extremely grateful to everyone at Open Tution.

    My question is, shouldn’t the exchange rate be Pounds/USD since the base rate should be the left one and the quoted on the right? That was what I learned in F9.

    My working would be $100,000*1.6250

    Please assist

    Vin

      • Thank you for the reply.

        Sorry, to clarify further, shouldn’t the base currency be on the left and quoted on the right? To my understanding, for example, $/Pounds = 0.8

        which means to say, 1 USD = 0.8 pounds.

        I asked a friend who did f9 as well and she adopted that method too. Not sure why its the other way round.

        hope to hear from you and sorry for disturbing

        vin

      • As far as both the FM and AFM exams are concerned, if there is an exchange rate given as $/Pound 0.80 then it means that 1 Pound = $0.80. The lectures are correct!!!

        (And before you say that you (and your friend) both passed Paper FM but took it the other way, then unless you scored 100% then maybe that was one of the reasons. Also there is never an awful lot of foreign exchange in Paper FM but in AFM there is always a 20 mark question that is either foreign exchange or interest rate management, which makes it much more important.)

        The current examiner is very fair in that more commonly he will give the exchange rate as $0.8 per pound. Then there is no possibility of confusion. However he doesn’t need to do that and doesn’t always do that.

    • We create the expense so as to match the income (in the same currencies). That way, if the exchange rate changes then either we get. more income but also more expense (when they are converted to out own currency, or the other way round. In both cases the extra income and extra expense (or the lower income and lower expense) cancel each other out, so the net amount (in our currency) stays the same.

  5. Hallo John, I used to use Reuters, Bloomberg, and many many other services. Every time the first currency is base and equals to 1, the second one is quoted.

    Do you know why on ACCA exam it is other way round? It is so confusing…

    Best,

  6. Dear John,

    I am preparing for my June sitting.

    Is there any lecture available where you have explained the conversion of foreign currency i.e. when to multiply or divide (in detail)?. As I am still struggling with the basic part.

    Thanks.

  10. Dear Mr. John,

    Kindly help me with this if you are given inflation rate of 8% and operating profit for various years as cash flow then you have operating profit after depreciation also. and was told all these profit are on real terms.

    Is it right to inflate the operating profit after depreciation by the rate of 8% and then add it back to the various operating profit to get the cash flow and then inflate these cash flow figure by 8%?

  11. Mr. John Moffat,

    Really helpful lectures! Thanks a lot.

    I took the remote AFM Exam on Friday. The paper was a relatively straight forward one but I couldn’t finish the paper on time. I guess my practice with the computer wasn’t sufficient and I felt very unfamiliar with the response format. Also, in the last 20 minutes of the exam, the connection to the server was lost and couldn’t be restored for a while (an hour!). So the exam i believe got submitted anyways.

    Nevertheless, all the lectures were clearly explained and I thank you again sir.

    I will be starting to work on the AFM again with the computer because I am not confident I would get a pass on this one. However, I am glad that the fail is not because of a lack of sufficient knowledge and will work harder for the next one!

    Thanks,
    Sri

  12. Hi John! Thanks for the lessons. They are great.

    Could please explain me a easy way to know when I should consider as call option or put option. I understand the a call option gives the right to buy and put option gives the right to sell.
    For example in the UK and have:
    to pay dollars
    to receive dollars
    Which option should I used for each situation?

    • If you are paying dollars then you need to buy dollars and sell pounds.
      Which options you buy depends on which currency the options are quoted it – you need a call option in dollars (because you want to buy dollars) or a put option in pounds (because you want to sell pounds).

      In future please ask this sort of question in the Ask the Tutor Forum rather than a comment on a lecture 馃檪

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