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October 13, 2020 at 7:48 am
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!
John Moffat says
October 13, 2020 at 8:46 am
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.
December 10, 2019 at 6:05 am
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 ..
December 10, 2019 at 9:19 am
Thank you for your comment 🙂
August 21, 2019 at 11:21 am
Hello,how did you get 1.0145 because i got 1.45% and divided by it but no via 1.0145?thank you
August 21, 2019 at 4:31 pm
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.
August 26, 2019 at 9:31 pm
I get the logic,thank you.
August 27, 2019 at 5:32 am
You are welcome 🙂
May 11, 2019 at 9:51 pm
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)?
May 12, 2019 at 9:58 am
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).
December 1, 2018 at 6:50 pm
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?
December 2, 2018 at 8:59 am
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)).
December 2, 2018 at 12:11 pm
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?
December 2, 2018 at 5:20 pm
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).
August 7, 2018 at 9:16 am
Hi, interesting lecture.
So the final deal is at an effective rate of 1.5510, i.e., .84 disc
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