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Foreign exchange risk management (1) Part 7 – ACCA (AFM) lectures

VIVA

Reader Interactions

Comments

  1. vin96 says

    September 26, 2022 at 4:34 pm

    Thank you, Sir.

    You deserve all the happiness in this world

    Log in to Reply
    • John Moffat says

      September 26, 2022 at 4:46 pm

      Thank you for your comment 馃檪

      Log in to Reply
  2. julianleong says

    August 16, 2022 at 7:31 am

    Hi John,

    I used example 11 to practise converting at the lock-in rate (1.4843) and realized that the net result differed from the question answer. One reason would be the contract number which is not exact. After accounting for this, it still does not match and I realized that due to the differences in the spread between the spot rate (buy and sell) on the futures purchase (75 ticks) and sell (21 ticks) dates, the net result will not match exactly.

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    • John Moffat says

      August 17, 2022 at 7:52 am

      That is true, but I do explain this in the lectures.

      Log in to Reply
  3. druscilla says

    March 1, 2022 at 1:07 pm

    Hello Sir,
    Since we鈥檙e taking the days from 20th June to 31st September, shouldn鈥檛 the days be 10 for June, 31 for July, 31 for August, and 30 for September? Which would be 10+31+31+30=102 days? Kindly clarify.

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    • druscilla says

      March 1, 2022 at 1:22 pm

      Realized that this error was clarified in the video. Thank you.

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      • John Moffat says

        March 1, 2022 at 3:56 pm

        No problem 馃檪

  4. mybookworm says

    October 24, 2021 at 5:26 pm

    Thanks Sir for your clear and inspiring lecture
    I have a question, please help to clarify, why in example 11 we round down the contracts from 5.39 to 5 but not round up to 6, will it make us more risk when we do not cover all the amount of the original transaction in the future deal?

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    • John Moffat says

      October 25, 2021 at 8:00 am

      There will be some risk whichever way you round – either due to the exchange rate changing or to the futures price changing.

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  5. rhythm says

    May 18, 2021 at 10:01 pm

    Hi John,

    Could you please explain the bank ‘buys low sells high rule’? I have watched your previous lectures but I am still getting confused.

    Like in example 11,

    We OWE $500,000 and so we will sell pounds in order to buy $ (and the base currency is $). So according to this when we buy $, the bank will sell $ at a higher price (so that the bank is benefited from the transaction).

    But in this example when you converted the $500,000 on 12th September you used the lower rate i.e 1.4791 rather than 1.4812.

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    • John Moffat says

      May 19, 2021 at 7:34 am

      I do not use that ‘rule’!! It is safer to use logic in Paper AFM rather than just learn ‘rules’.

      You use whatever rate is the worst one for the company. In example 11, we are buying $’s. The exchange rate is for the $ quoted against the Pound (so it is the number of $’s that 1 Pound will buy). 1.4791 means that the company pays more Pounds (500,000/1.4791) than if we used 1.4812 (which would mean paying 500,000/1.4812 Pounds).

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      • rhythm says

        May 20, 2021 at 5:41 pm

        Fair enough!

        Thanks, John

  6. mkoshtayev says

    December 10, 2020 at 11:41 am

    Hi John. thank you for your lectures.
    i have question regarding the calculation of basis on transaction day.
    It is from the question #2 from AFM December 2018.
    the approach of the examiner in my opinion conflicts with your approach

    shortly the period is 7 months:
    transaction happens on the end of 6th month:
    and the examiner does the following: Futures price = Lock in rate + 6/7 * basis. but by your logic we should use 1/7 since there is only 1 month left. Could you please clarify that part for me?

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    • John Moffat says

      December 10, 2020 at 2:40 pm

      No. The exam answer has calculated the lock-in rate as being the current spot + 6/7 of the basis.
      Alternative you can calculate it as the current futures price less 1/7 of the basis.

      Both ways always give the same result. (As to whether to add or subtract in both cases, just remember that the lock-in rate must always be somewhere between the current spot and the current futures price 馃檪 )

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      • mkoshtayev says

        December 10, 2020 at 5:40 pm

        Now I got it. Thank you very much!

      • my life says

        May 2, 2021 at 6:31 pm

        Thank you.

  7. alextrieste says

    November 18, 2020 at 4:49 pm

    Quick question about the spot rates. In this case we owe a supplier $500k so we are going to sell 拢 to buy $.

    On the 20.06 I considered the relevant rate to be 1.4821 and on the 12,09 the relevant rate would be 1.4791.

    When calculating the future value I used the above mentioned rates and I did not calculate the average.

    20-Jun 12-Sep 30-Sep

    spot 1.4821 1.4791 x

    future 1.4840 1.4794 x

    basis 0.0019 0.0003 0

    Can it be considered correct in an exam scenario or I am going to lose marks?

    Thanks, all the lecture was really helpful.

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    • John Moffat says

      November 19, 2020 at 12:40 pm

      That would be fine in the exam 馃檪

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  8. Mahrukh says

    November 22, 2019 at 6:49 pm

    Hello John, the point you mentioned at 27:19 ”that if the futures rate is lower than the spot today, then it will be lower than spot in future as well” is it just an assumption or it’s practically this way?
    You’re always a great help, Many thanks 馃檪

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    • John Moffat says

      November 23, 2019 at 10:40 am

      It is an assumption, but is something that would almost always be the case in real life as well.

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      • Mahrukh says

        November 25, 2019 at 6:34 am

        Thank you, one more question that if the spot rate at the transaction date is not given, how will we calculate closing futures price. Can we use forward rate quoted at the transaction date as expected spot?
        Also many times examiner calculates the basis as the difference between two futures prices quoted, rather than difference between current spot and futures rate (Dec 2018 Q2), why is that so and in what case this approach will be required in exam?
        Thank you for your support 馃檪

      • John Moffat says

        November 25, 2019 at 7:37 am

        When we do not know the spot rate at the date of the transaction we use the lock-in rate instead. There is more than one way of arriving at the lock-in rate, but the method I explain in the lecture is strictly the correct way.

      • Mahrukh says

        November 26, 2019 at 1:38 pm

        Understood, thankyou 馃檪

      • John Moffat says

        November 26, 2019 at 4:28 pm

        You are welcome 馃檪

  9. prateesh says

    November 19, 2019 at 3:23 pm

    Hello sir, in the final step on 12th Sept, while converting 500,000$ to pounds we used the rate at 1.4791. And in the next step we are using 1.4812 to convert the profits earned from dollars to pounds.

    My question is, should we not use the same rate (which is 1.4791) to convert the profits into pounds. Please clarify me.

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    • John Moffat says

      November 19, 2019 at 3:35 pm

      For the $500,000 we are buying $’s and therefore use 1.4791.

      For the profit on the futures, we will be selling $’s and therefore use 1.4812.

      (However, you could in fact use the $ profit to make part of the $ payment, and that would be effectively the same as converting the profit at 1.4791)

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      • prateesh says

        November 19, 2019 at 6:15 pm

        Thank you so much for the clarification sir.

  10. Cynthia says

    August 24, 2019 at 11:19 pm

    Hello Sir, is there a reason why august was missed out in arriving at the basis period. I am a bit confused, please help clarify.

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    • Cynthia says

      August 24, 2019 at 11:33 pm

      Oh seen…..

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      • John Moffat says

        August 25, 2019 at 10:09 am

        I am pleased you sorted it out 馃檪

  11. chimmm says

    May 27, 2019 at 5:14 pm

    Just like in example 9 we were selling the first currency which is the us dollar so we used the higher rate both at the time of converting at spot rate which was 1.5190 and also on converting the gain on futures we used this higher rate.

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  12. chimmm says

    May 27, 2019 at 5:07 pm

    Sir,t thanks for the lectures . I wanted to ask that in example 11 you have used the higher spot rate on Sept 12 to convert the gain on futures whereas in this example we we’re actually buying usd to pay the supplier and as the dollar is the first currency and we’re buying it so shouldn’t we take the lower rate 1.4791 to convert the gain on futures???. since this is also the rate at which converted the transaction at spot rate $500000梅 1.4791

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  13. shahtanya says

    May 5, 2019 at 9:21 am

    Hi John ,
    In the last bit of example 11, while converting the gain to pounds why have we used the selling rate of 1.4812 . We did use 1.4791 as the rate for converting $500000 on 12th sep so shouldn’t the same rate be used for the gain calculation ?

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    • John Moffat says

      May 5, 2019 at 12:46 pm

      When converting the $500,000 we are buying dollars. When converting the gain we are selling dollars (because the gain is calculated in dollars).

      (Out of interest, you could use some of the dollar gain to make part of the dollar payment, which then would effectively convert it at 1.4812)

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  14. kokilauma says

    February 17, 2019 at 11:39 am

    Hello, Sir.
    Since we’re taking the days from 20th June to 31st September, shouldn’t the days be 10 for June, 31 for July, 31 for August and 30 for September? Which would be 10+31+31+30 that is 102 days? Do correct me if i’m missing something.
    Thanks a tonne.

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    • kokilauma says

      February 17, 2019 at 11:43 am

      Oh Sorry, my doubt just got cleared.

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  15. zhixiang85 says

    January 28, 2019 at 7:12 am

    Hi John,

    For example 11 (say in the real exam scenario), will I score any extra marks if I do the following format?

    – Sell Pound Futures
    – Price 1.4840 – End September 2004
    – Tick value $6.25
    – No of contract: 5 [workings below ($500,000 / 1.4840) / GBP 62500]

    In case of indicating “Sell Pound Future” is to remind myself for Sell high 1.4840, and buy back low 1.4799 for profit, make sure my tireness doesn’t cause me to do the opposite (Loss) for a Buy Pound scenario

    Thanks

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    • John Moffat says

      January 28, 2019 at 7:21 am

      Thats fine

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  16. lphilip says

    December 2, 2018 at 11:20 am

    Hi Sir ,

    Can basis risk be negative ?
    Here in the above example , spot price is greater than future price and hence basis is positive .
    In few exam questions future price is higher than spot price , so that means basis will be negative . Is this logic applicable to all questions regardless or receipt or payment ?

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    • John Moffat says

      December 2, 2018 at 5:18 pm

      Yes – although I don’t really like to think of it as being negative even though arithmetically I suppose it is. But more importantly the futures price can be higher or lower than the spot rate and therefore it will always be higher or lower as the difference approaches towards zero.

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  17. tolahenryoni says

    October 24, 2018 at 4:04 pm

    Good day. Thanks for the lecture. On the e.g. 11. I do not understand why you are deducting the 1.4799 from 1.4840 to calculate the gain on the futures. In the last 2 previous examples we deducted the sell was the closing future price and the buy the future price now.

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    • John Moffat says

      October 25, 2018 at 8:47 am

      In example 9, the underlying transaction is selling $’s because they are receiving $’s. In example 11 the underlying transaction is buying $’s because they are paying $’s.

      We buy or sell futures at the current price depending on whether the underlying transaction involves buying or selling the currency. I do explain this, and also read again note 1 below example 9 in the lecture notes.

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      • Elena says

        May 8, 2019 at 4:37 pm

        Hello. Please clearify the note 1 to the example 9: why have we to buy futures when we buy currency? I guess we act on the “contraversial” and in the following examples there are written “buy” futures when we sell the currency and “sell” wnen we buy currency.

        And one more question: there is no question 13 in the answers.

        (Thank you, the lectures and notes are very helpfull)

      • John Moffat says

        May 8, 2019 at 4:41 pm

        We buy futures when the transaction involves buying the currency in which the futures are quoted (the currency in which the contract size is quoted). We sell futures when the transaction involves selling the currency in which the futures are quoted.
        This is what happens in all of the examples.

        There is no printed answer to example 13, but I explain the free lectures.

      • Elena says

        May 9, 2019 at 11:17 am

        It will be clear to give the last words in the note to the ex.9:
        “The contract currency is the currency in which the FUTURS contract is quoted”.

        I really spend several days to get what was meant there.

      • John Moffat says

        May 9, 2019 at 3:10 pm

        I am not changing the notes, because I make this clear in the lecture (and the notes should not be used on their own – it is in the lectures that I explain and expand on the notes).

  18. lucie13 says

    September 3, 2018 at 9:15 pm

    Dear John

    I do find it enjoyable watching your lectures:) thank you for doing what you have been doing. It is much appreciated.

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    • John Moffat says

      September 4, 2018 at 8:10 am

      Thank you for your comment 馃檪

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  19. John Moffat says

    August 13, 2018 at 7:47 pm

    You are welcome 馃檪

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  20. ashlan says

    August 12, 2018 at 7:27 pm

    Hi Mr Moffat, I may be wrong but from 1 July to 31 August should actually be 2 months? Therefore 0.0200 x 2/3 (rather than 1/3). Then from 31 Aug to 30 Sep will be 1/3. You made the point very clearly, I just want to make sure that this logic is correct. Thanks for the lectures!

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    • John Moffat says

      August 13, 2018 at 5:11 am

      1 July to 31 August is indeed 2 months. Therefore the basis will have fallen by 2 months out of 3, and the basis remaining will be for 1 month out of 3 i.e. 1/3 x 0.200.

      The answer is correct 馃檪

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      • ashlan says

        August 13, 2018 at 6:31 pm

        Oh I see, that makes sense 馃檪 Sorry I was a bit confused, now I see how you did it. Thanks so much!

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