What we're basically doing is working backwards as opposed to Example 3, since we have to PAY in 3 months time.
We need to distinguish how many $'s to buy NOW, step 1 does not mean we have the $'s; we are only calculating how many dollars we would need to buy TODAY and DEPOSIT it today for it to be equal to $8 Million in 3 months time.
In Step 2, since we do not have that $'s, we are BUYING them for the said amount in £'s (The amount of £'s we will need to BUY $'s TODAY, for the aforementioned deposit, and the amount we need to BORROW).
And lastly, now that we know how many £'s we need to buy the $'s with, we calculate the 3 months interest on that said amount of £'s when we BORROW it. The amount that will need to be repaid in 3 Months time.
As for the Spot and Interest rate. The logic, as John mentioned in the earlier lectures, is simple; The Bank Needs To Make Money. We are always in a situation of Disadvantage, we pick the rate that give us either the least return (deposit) or the rate at which we have to pay the most interest (borrowing). Same goes for the Spot Rate, when we're buying/selling, we pick the rate that gives the most disadvantage in terms of either receiving less or paying more after conversion.
Furthermore, whether its 3 Month LIBOR or 6 or 9; the interest rate will always be per annum. This is for standardization (Comparability), and for our own ease since it is easy to prorate it. If you do not understand this logic, just remember that whatever month LIBOR or Prime it is; its per annum and needs to be prorated.
Q
Qasim·
Example 6*
A
Adithya·
Sir if the company has enough funds, why do we need to borrow money? Wc could instead convert the available funds into USD which will interest in interest savings
A
Adithya·
hi sir
For the deposits we consider the US interest rates. which means, we are investing in the US money markets right?
O
Odi·
Hi the pound i pay after borrowing is more than i exchange the dollar today. So does it means i am suffering because of the negative result?
J
John MoffatTutor·
It depends on whether you are receiving or paying dollars.
K
khobby·
Hello Sir,
If we have $7,874,016 and we want the equivalent in pounds, then it means we are selling the first currency which is ($). The appropriate rate to use should then be the higher rate which is £1.6283. This is the understanding from previous studies.
However, you divided the $7,874,016 with the lower rate which is £1.6201.
Could you please clarify?
Thank you sir.
J
John MoffatTutor·
In this example we are buying dollars (not selling them), so that we will have enough to later (when interest is added) to be able to pay the $8M.
F
Fowzia Ibrahim·
Hello Sir, in example 6 while borrowing, we divided the 5M with 1+the interest rate. but in example 7 the amount borrowed is multiplied with 1+the interest.
may you please explain why we cant divide the amount to be borrowed with the interest in example 7.
thanks
J
John MoffatTutor·
If you borrow money, then at the end of the period you are owing more money.
K
kasobi·
Good day sir.
I have a similar concern as Foziaibrahim above, why then in example 6 did we receive $4.9M and not more than the $5M. It's still not clear to me how in example 6 when borrowing we divided by 1.0145, while investing we multiplied by 1.009. Meanwhile in example 7 while borrowing we multiplied by 1.02475 and while investing we divided by 1.0116. I was expecting the actions of "borrowing" or "investing" to be treated same in both questions. Can you please enlighten me so i understand better? Thanks
J
John MoffatTutor·
We are going to receive $5M in 3 months. So the amount we borrow now must be such that after adding on 3 months interest on the borrowing it comes to $5M (so that the $5M will be enough to repay the borrowing together with the interest on the borrowing). Therefore we can only afford to borrow $4.9M now. After 3 months interest we would be owing $5M and so the receipt in 3 months will be enough to repay the borrowing.
A
Ahmed·
The question says 3 months interest rate why have you converted it yet again to a monthly rate
J
John MoffatTutor·
I do actually explain in the lecture that interest rates are always quoted as annual rates even though they only apply to loans and deposits for the period stated (in this case 3 months).
If the loan or deposit was for 6 months then the interest rate quoted would still be quoted as an annual rate, but would be a different annual rate.
S
sharon1507·
Hello, i am really confused about when to divide and when to multiply. Can someone help me please. Thank you
J
John MoffatTutor·
Have you watched the first in this series of lectures?
Z
zaidrafiqkhan·
Basically this is the core problem most students faced,
Just remember one simple thing you have to pay high and receive low amount... so do your calculations in that way.
N
noor·
Use the following table
First currency. Second currency
Payments _We buy Low rate High rate
We sell. High. Low
Conversion Division Multiplication
D
douglasnyangara·
Use cross multiplication, if $1.6= 1 pound , then $8M = ?
J
John MoffatTutor·
If you want to deposit $'s then you need to buy $'s in order to have $'s to put on deposit.
D
devilspal·
Thank you. Helps!
J
John MoffatTutor·
You are welcome :-)
T
Tash·
Hi Sir,
When you convert the $ deposit of 7,874,016 to find out how many pounds you need to borrow, shouldn't you divide by 1.6283 because you will have to sell $'s to buy pounds?
R
rehan1o1·
same question sir, kindly reply
J
John MoffatTutor·
I did reply the same day - the reply is above the question :-)
D
douglasnyangara·
Always work on the assumption that you're at a disadvantage, you need to borrow, what rate makes you borrow the most?
M
mariya·
Thanks. Finally you said it the easy way! I had been so confused.
We need to distinguish how many $'s to buy NOW, step 1 does not mean we have the $'s; we are only calculating how many dollars we would need to buy TODAY and DEPOSIT it today for it to be equal to $8 Million in 3 months time.
In Step 2, since we do not have that $'s, we are BUYING them for the said amount in £'s (The amount of £'s we will need to BUY $'s TODAY, for the aforementioned deposit, and the amount we need to BORROW).
And lastly, now that we know how many £'s we need to buy the $'s with, we calculate the 3 months interest on that said amount of £'s when we BORROW it. The amount that will need to be repaid in 3 Months time.
As for the Spot and Interest rate. The logic, as John mentioned in the earlier lectures, is simple; The Bank Needs To Make Money. We are always in a situation of Disadvantage, we pick the rate that give us either the least return (deposit) or the rate at which we have to pay the most interest (borrowing). Same goes for the Spot Rate, when we're buying/selling, we pick the rate that gives the most disadvantage in terms of either receiving less or paying more after conversion.
Furthermore, whether its 3 Month LIBOR or 6 or 9; the interest rate will always be per annum. This is for standardization (Comparability), and for our own ease since it is easy to prorate it. If you do not understand this logic, just remember that whatever month LIBOR or Prime it is; its per annum and needs to be prorated.
For the deposits we consider the US interest rates. which means, we are investing in the US money markets right?
If we have $7,874,016 and we want the equivalent in pounds, then it means we are selling the first currency which is ($). The appropriate rate to use should then be the higher rate which is £1.6283. This is the understanding from previous studies.
However, you divided the $7,874,016 with the lower rate which is £1.6201.
Could you please clarify?
Thank you sir.
may you please explain why we cant divide the amount to be borrowed with the interest in example 7.
thanks
I have a similar concern as Foziaibrahim above, why then in example 6 did we receive $4.9M and not more than the $5M. It's still not clear to me how in example 6 when borrowing we divided by 1.0145, while investing we multiplied by 1.009. Meanwhile in example 7 while borrowing we multiplied by 1.02475 and while investing we divided by 1.0116. I was expecting the actions of "borrowing" or "investing" to be treated same in both questions. Can you please enlighten me so i understand better? Thanks
If the loan or deposit was for 6 months then the interest rate quoted would still be quoted as an annual rate, but would be a different annual rate.
Just remember one simple thing you have to pay high and receive low amount... so do your calculations in that way.
First currency. Second currency
Payments _We buy Low rate High rate
We sell. High. Low
Conversion Division Multiplication
When you convert the $ deposit of 7,874,016 to find out how many pounds you need to borrow, shouldn't you divide by 1.6283 because you will have to sell $'s to buy pounds?