Foreign exchange risk management (1) Part 3 – ACCA (AFM) lectures
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Hi sir, many thanks for another great lecture!
The question already says current 3 months interest, i guess we should not pro-rata the interest rates, should we?
The interest rate are always per year (and need pro-rata’ing). It is simply that the interest rates quoted are different depending on the period (just as with all interest rates in real life).
Hi, great lecture.
Just a have a small doubt, can we use the interest rate parity formulae in the exam fr money market hedging?
Thank you!
It really depends on the question. For most questions in Sections A and B you can, for questions in Section C you will be expected to show the workings in full.
thank you for your quick response
Sir i don’t understand the rational behind depositing the money received, as in why is the step 3 necessary? After all our position got hedged safely in step1 and 2 itself.
We were to receive money in 3months time, but now that we received it early, why cant we just make use of it, especially after having everything hedged.
Your response would be much appreciated sir! Thanks as always for the beautiful video lectures!
Yes, they could make use of the money now. The reason in the exam that we deposit it is so as to make it directly comparable with other ways of hedging where the money is only available on the future date.
Really Thanks a lot sir ,till today my mind was really confusing about logic”s of foreign exchange markets ,but because of your lecture and notes i am very happy and confident ..
Thank you for your comment 🙂
Hello,how did you get 1.0145 because i got 1.45% and divided by it but no via 1.0145?thank you
Just as to add on interest at 1.45% we multiply by 1.0145 (i.e. 1+r), to ‘remove’ interest at 1.45% we divide by 1.0145.
It is the same logic as discounting and if you are still unsure it will help you to watch the Paper MA (was F3) lectures on interest and discounting.
I get the logic,thank you.
You are welcome 🙂
Hi sir, regarding to final amount received on deposit, aren’t we only receive the interest since we are repaying the loan using our principal? Instead of receiving GBP 3,223,709 of principal + interest, shouldn’t we only receive GBP 28,754 (GBP 3,194,954*0.009)?
Thanks.
We are not repaying the loan using our principal.
We are repaying the loan using the money that is received in 3 months time.
I do suggest that you watch the lecture again (and maybe the relevant FM (was F9) lectures, because money market hedging is revision from Paper FM).
In Example 6
It is said that Current 3 month interest rates: US prime 5.2% – 5.8% and
UK LIBOR 3.6% – 3.9%, so why we should divide them with 12 and multiply with 3?
Because interest rates are always quoted as yearly rates (as is the case in real life, and as was the case in Paper FM (was F9)).
Ok, it just in the example were stated that are given 3 month interest rate.
Also is it true that the cost of an interest rate floor is higher than the cost of an interest rate collar?
Always the interest rates are given as yearly rates. The yearly interest rate will be different for different lengths of depositing or borrowing – so a rate for 3 month deposits will be different that the rate for 1 month deposits, but they will both be quoted as annual rates.
You can’t compare a floor with a collar. However the whole point of creating a collar is to reduce the net premium cost of just having a cap (if borrowing money) or just having a floor (if depositing money).
Hi, interesting lecture.
So the final deal is at an effective rate of 1.5510, i.e., .84 disc