John. thank you, makes sense.
So you could get forward rates which are worse if markets are expected to stay the same or decrease?
Would they just show this as 2 negative numbers for the "3m forward"?
J
John MoffatTutor·
Yes, you can get forward rates. No there are not negative numbers - the differences are shown as pm and dis, as I explain in the lecture. However the current examiner does not bother with this - he just states the actual forward rates directly.
P
Pedro·
What doesn't make sense is that the one month rate is better than the current spot rate.
Ex 3, using current spot rate 200k/ 1.482 = 134953.
Whereas the forward contract is only 134138, so we are paying less.
I would have expected this forward rate to be worse than the current spot rate
J
John MoffatTutor·
Why? The forward rates are fixing a rate to use in the future. If the markets are expecting the spot rate to get better then the forward rate will also be better.
D
dimention999·
sir, I want to know the details about where there is multiple forward rate and question ask me using different forward rate other than the given forward rate in question.
J
John MoffatTutor·
The first rate is the rate to use if the company is buying the first mentioned currency. The second rate is the rate to use if the company is selling the first mentioned currency.
D
danielthesecond·
What do you mean by first mentioned currency?
J
John MoffatTutor·
If the exchange rate is quoted as a $/€ rate, then the first currency is $'s.
I do spend a lot of time explaining this in this lecture!!
J
John MoffatTutor·
Yes - if the company is buying currency they pay the higher amount, and if they are selling currency they receive the lower amount :-)
E
edgar·
After watching this lecture I am now able to understand what I have been struggling to understand
J
John MoffatTutor·
Great :-)
Z
zaidrafiqkhan·
In simple, We have to pay always higher and receive always lower amount, if we translate into Exchange rates.
Am I correct John?
J
John MoffatTutor·
Correct :-)
D
dieazbie·
I thought we buy currency at a higher rate and sell currency at a lower rate ?
If we buy at a higher rate then it's meant to be divided by 1.4970?
C
Charity·
I learnt that banks buy low and sell high . Thats how they make a profit
J
John MoffatTutor·
That is how they make a profit as I explain in the lectures. However which of the two rates we use depends on which way round we are converting (i.e. which of the two currencies is being converted into the other currency).
I explain how to decide which rate to use in my lectures (and it is always whichever rate is worse for the company because, again, it is the bank that makes the profit).
So you could get forward rates which are worse if markets are expected to stay the same or decrease?
Would they just show this as 2 negative numbers for the "3m forward"?
Ex 3, using current spot rate 200k/ 1.482 = 134953.
Whereas the forward contract is only 134138, so we are paying less.
I would have expected this forward rate to be worse than the current spot rate
I do spend a lot of time explaining this in this lecture!!
Am I correct John?
If we buy at a higher rate then it's meant to be divided by 1.4970?
I explain how to decide which rate to use in my lectures (and it is always whichever rate is worse for the company because, again, it is the bank that makes the profit).