Thank you, there it was! Got it, you explain it in such simple terms too.. I will never buy a study guide again as long as you are doing these lectures! ?

This is the fact that futures prices change as spot rates change, but they do not change by exactly the same amount. This is explained in my lecture on futures (but you cannot be asked specifically about basis risk in F9, you are only be expected to understand basically how futures are used – calculations cannot be required).

Sir i have one practical question to ask you based on this lecture. We had to travel to Norway from UK and I wanted Norwegian Kroner. The lady said that if you book now to collect it after a week it would be fixed at today’s rate. In your example when X plc want to make transaction in months time there is a different fixed rate ( not spot rate). Why did the lady in our case would have just agreed to fix the spot rate for us when we wanted kroner after one week?

In future please ask this sort of question in the Ask the Tutor Forum. I don’t always see comments on lectures.

The reason is probably because they didn’t have any Kroner in stock 🙂 They could arrange to buy it today, but then would have to wait for it to arrive.

I am confused when you mentioned the interest rate has to be divided by 12 months and multiply by 3 months (3 months borrowing). isnt it the question stated current 3 months interest rate = 5.2% – 5.8% ?

my thinking is that since question has already stated 3 mths interest rate, and we do not need to divide it by 12 mths. we divide it by 12 months only when the question did not state the interest rate is 3 months. Is my understanding correct?

this the first time i am watching a video lecture from opentuition, the tutor is so amazing. he has so much clear understanding of what he is teaching. now i so want to have lectures that cover all the syllabus of f9, i haven’t checked yet but i really hope it’s available in this website with this high quality lectures by such an amazing tutor. i will not have to pay extra for tuition then. sir, you are genius! i hope the website has a whole package!

Sir, Thanks a lot for this video. I am confused at the first step of the question…the question states he’s going to receive 5m$ in 3 months time and the first step says to borrow $’s.I get confused why we will buy $’s when we are going to receive them.Why will we borrow it?Can you plz clear it. Thanks a lot.

Hello Sir John, Thanks for the good work in helping us. The lectures are so helpful.

What I can’t get my head around however is how to use the interest rate parity formula the determine the forward rate of 5M/3223709=1.5510 as arrived at in chapter 23 example 6. Or the two are not related? I.e can we use the interest rate parity formula to determine the rate arrived at using the money market hedging concept. Thanks in advance and awaiting your prompt response.

In real life, it is the interest rates that determine the forward rate (using the interest rate parity formula).

In the exam however, when the examiner asks this he asks you to use the forward rate, and separately to use money market hedging, and then state which gives the better result (i.e. the bigger receipt, or the lower payment)

In practice, they would both give the same result (ignoring the transaction costs involved).

Sir please help me with this…! your lectures were very clean and clear,but when it comes with a different currency its very very confusing…. i just don’t know what to borrow and what to deposit and also from where to borrow?? haha please read the question and make me understand this..thanx in advance A company whose home currency is the dollar ($) expects to receive 500,000 pesos in six months’ time from a customer in a foreign country. The following interest rates and exchange rates are available to the company: Spot rate 15·00 peso per $ Six-month forward rate 15·30 peso per $ Home country Foreign country Borrowing interest rate 4% per year 8% per year Deposit interest rate 3% per year 6% per year Working to the nearest $100, what is the six-month dollar value of the expected receipt using a money-market hedge?

sir,could you explain me in money market hedge,say if we are receiving pesos and home country is US,in which currency are we borrowing?? say we are receiving 500,000 pesos in six months..so are we borrowing in pesos if so what rate do we have to apply,i mean is it home country’s borrowing rate or foreign country’s borrowing rate.., its very confusing!!

If we are receiving pesos on a future date, then we borrow pesos now (at the peso interest rate), so that we can convert to $’s now (at the current spot rate) and then invest the $’s at the $ interest rate, When we actually receive the pesos, we use them to repay the peso borrowing. At the same time, the $ deposit matures, so we receive $’s.

so,that means we are always borrowing and depositing what we are receiving/paying in future applying the interest rates depending on the currencies we are borrowing and depositing.. is that correct???

I tend to believe that this tutor has an astonishingly excellent understanding of what he is teaching. Maybe this is not because he studied well but more importantly he has real life experience of everything…………….Thank you so much for delivering such a masterpiece video…………..

I have 1 Question to ask, The Interest Rate for 3 Months you calculated 1.45%, Instead of writing 0.0145 (1.45/100) why you wrote 1.0145? similarly in 0.9% interest rate you wrote 1.009 instead of 0.009? it is a rule that you add 1 to every interest rate or am I missing something?

Hi John, Sorry, but I still don’t get this. I have the same question. i understand what you said “Multiplying by (say) 1.01 is the same as adding on 1%” but why we even add 1% or multiply with 1.01

hi there Awesome lecture just one query ! when we hedge a receipt , in the third step, when we multiply £ 3194954 with the interest rate we get £3223709. this amount is greater than what we require, the extra is the interest we received right? so why don’t we deposit an amount which after adding the interest becomes £ 3194954 ?? ie by dividing the amount by the interest rate ??

sir….u said that lower interest rate is used for when you are borrowing money and higher when you are depositing money…so in example 6 instead of using 5.2% you used 5.8%…can you explain why? or is it am i understanding this wrong…thank you

if i get a chance i would kiss you ………….. jokes apart……… want to see knighted by the queen of england……………..u r a boon to students……guess what… i pay and get sub standard lectures…………………

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barbadoshk says

Sir,

Please help I cannot get my head around whether to divide or multiply by the spot or forward rate 🙁

John Moffat says

Have you watched the first of the lectures on this chapter, because I explain the ‘rules’ with examples in the first lecture.

barbadoshk says

Thank you, there it was! Got it, you explain it in such simple terms too.. I will never buy a study guide again as long as you are doing these lectures! ?

barbadoshk says

I just got 3, 4 & 5 right first time, fabulous thank you again!

John Moffat says

You are welcome, and well done 🙂

(But make sure you have a Revision Kit from one of the ACCA approved publishers, so that you have plenty more questions to practice 🙂 )

mayola says

sir,what is basis risk ?

John Moffat says

This is the fact that futures prices change as spot rates change, but they do not change by exactly the same amount. This is explained in my lecture on futures (but you cannot be asked specifically about basis risk in F9, you are only be expected to understand basically how futures are used – calculations cannot be required).

rakhi2rakhi says

Sir i have one practical question to ask you based on this lecture. We had to travel to Norway from UK and I wanted Norwegian Kroner. The lady said that if you book now to collect it after a week it would be fixed at today’s rate. In your example when X plc want to make transaction in months time there is a different fixed rate ( not spot rate). Why did the lady in our case would have just agreed to fix the spot rate for us when we wanted kroner after one week?

John Moffat says

In future please ask this sort of question in the Ask the Tutor Forum. I don’t always see comments on lectures.

The reason is probably because they didn’t have any Kroner in stock 🙂

They could arrange to buy it today, but then would have to wait for it to arrive.

JR says

Dear John,

I am confused when you mentioned the interest rate has to be divided by 12 months and multiply by 3 months (3 months borrowing). isnt it the question stated current 3 months interest rate = 5.2% – 5.8% ?

my thinking is that since question has already stated 3 mths interest rate, and we do not need to divide it by 12 mths. we divide it by 12 months only when the question did not state the interest rate is 3 months. Is my understanding correct?

John Moffat says

No.

Banks always quote interest rates as annual interest rates. The annual interest rate will be different depending on the length of the loan or deposit.

nadia says

this the first time i am watching a video lecture from opentuition, the tutor is so amazing. he has so much clear understanding of what he is teaching. now i so want to have lectures that cover all the syllabus of f9, i haven’t checked yet but i really hope it’s available in this website with this high quality lectures by such an amazing tutor. i will not have to pay extra for tuition then. sir, you are genius! i hope the website has a whole package!

John Moffat says

Thank you for your comment 🙂

The lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.

Prahlad Singhvi says

Sir,

Thanks a lot for this video. I am confused at the first step of the question…the question states he’s going to receive 5m$ in 3 months time and the first step says to borrow $’s.I get confused why we will buy $’s when we are going to receive them.Why will we borrow it?Can you plz clear it. Thanks a lot.

John Moffat says

We are not buying $’s – we are borrowing $’s (which we will repay when we receive from the customer).

We borrow $’s so that we can convert them now at todays spot rate.

Ernest says

Hello Sir John,

Thanks for the good work in helping us. The lectures are so helpful.

What I can’t get my head around however is how to use the interest rate parity formula the determine the forward rate of 5M/3223709=1.5510 as arrived at in chapter 23 example 6. Or the two are not related? I.e can we use the interest rate parity formula to determine the rate arrived at using the money market hedging concept. Thanks in advance and awaiting your prompt response.

John Moffat says

In real life, it is the interest rates that determine the forward rate (using the interest rate parity formula).

In the exam however, when the examiner asks this he asks you to use the forward rate, and separately to use money market hedging, and then state which gives the better result (i.e. the bigger receipt, or the lower payment)

In practice, they would both give the same result (ignoring the transaction costs involved).

Ernest says

Thank you!

kafi says

Dear sir,

Thanks a lot. It’s clear at 1st attempt.

John Moffat says

You are welcome 🙂

aanaa says

Sir please help me with this…! your lectures were very clean and clear,but when it comes with a different currency its very very confusing…. i just don’t know what to borrow and what to deposit and also from where to borrow?? haha please read the question and make me understand this..thanx in advance

A company whose home currency is the dollar ($) expects to receive 500,000 pesos in six months’ time from a

customer in a foreign country. The following interest rates and exchange rates are available to the company:

Spot rate 15·00 peso per $

Six-month forward rate 15·30 peso per $

Home country Foreign country

Borrowing interest rate 4% per year 8% per year

Deposit interest rate 3% per year 6% per year

Working to the nearest $100, what is the six-month dollar value of the expected receipt using a money-market

hedge?

John Moffat says

You must please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.

aanaa says

so grateful for you’r quick response.

thank you sir

aanaa says

sir,could you explain me in money market hedge,say if we are receiving pesos and home country is US,in which currency are we borrowing?? say we are receiving 500,000 pesos in six months..so are we borrowing in pesos if so what rate do we have to apply,i mean is it home country’s borrowing rate or foreign country’s borrowing rate.., its very confusing!!

John Moffat says

If we are receiving pesos on a future date, then we borrow pesos now (at the peso interest rate), so that we can convert to $’s now (at the current spot rate) and then invest the $’s at the $ interest rate,

When we actually receive the pesos, we use them to repay the peso borrowing.

At the same time, the $ deposit matures, so we receive $’s.

aanaa says

so,that means we are always borrowing and depositing what we are receiving/paying in future applying the interest rates depending on the currencies we are borrowing and depositing.. is that correct???

John Moffat says

That is correct 🙂

ram456 says

I tend to believe that this tutor has an astonishingly excellent understanding of what he is teaching. Maybe this is not because he studied well but more importantly he has real life experience of everything…………….Thank you so much for delivering such a masterpiece video…………..

John Moffat says

Thank you for your comment 🙂

Katheryn says

You are a brilliant tutor, I have never got in until now. Thank you so much. I am so glad I discovered this website!

John Moffat says

Thank you 🙂

(I hope you will recommend us to your colleagues!)

farzana says

Dear sir,

Wanted to ask that the discount or premium offered is considered only for forward contracts or money market hedge??

Molusi says

You are the best, great lecture

sky1407 says

Sir what about PYQ DEC2008 Q4 C) why is the 16m not taken into account when calculating the deposits?

John Moffat says

It was not asked for. Part (c) asked you only to consider the future payment that will be made.

sky1407 says

thanks alot was confused earlier 😀 did not read the question properly 😀

hamzaharoon says

What a Great Lecture! Love You Sir John <3

I have 1 Question to ask, The Interest Rate for 3 Months you calculated 1.45%, Instead of writing 0.0145 (1.45/100) why you wrote 1.0145? similarly in 0.9% interest rate you wrote 1.009 instead of 0.009? it is a rule that you add 1 to every interest rate or am I missing something?

John Moffat says

Multiplying by (say) 1.01 is the same as adding on 1%. Multiplying by 1.02 is the same as adding 2%, and so on 🙂

hamzaharoon says

OH! Now I got it, Thanks 😀

purnima says

Hi John,

Sorry, but I still don’t get this. I have the same question. i understand what you said “Multiplying by (say) 1.01 is the same as adding on 1%” but why we even add 1% or multiply with 1.01

John Moffat says

You have not read my reply (or the original question) properly at all.

When I put ‘say’ in brackets, then this means it is just an example.

In the question that was asked, we were adding 1.45% and so we multiplied by 1.0145 to add on 1.45%. This is basic maths.

(I assume that you have watched the lecture on which you are commenting?)

jodiann22 says

Query: When i calculated my interest for the 3 months it was 0.9% (3.6* 3/12)….

I am not clear why it is that when you were calculating the interest it was 3,194,954 x 1.009 and not 3,194,954 x 1.09.

Please clarify.

John Moffat says

10% = 0.1

9% = 0.09

0.9% = 0.009

🙂

elphang76 says

Refer to the recent Mock Exam Questions, Q1.

Where redeemable debt was being mentioned as repayable at 10% premium after 10 years?

John Moffat says

It was not – it was an error and I will have it corrected. You would assume that it was repayable at par.

elphang76 says

Thanks a lot!

katesafire says

hi there

Awesome lecture

just one query !

when we hedge a receipt , in the third step, when we multiply £ 3194954 with the interest rate we get £3223709. this amount is greater than what we require, the extra is the interest we received right? so why don’t we deposit an amount which after adding the interest becomes £ 3194954 ?? ie by dividing the amount by the interest rate ??

John Moffat says

You have asked this question on Ask the Tutor, and I have just answered it there.

(We don’t have a specific requirement for receipt of pounds)

katesafire says

Yes I saw it , Thank you soo very much!!! I can finally move to the next topic. The lectures n the website are amazing. Thanks again !

John Moffat says

Great (and thank you!) 🙂

azshahke says

Thanks for all the efforts put into these lectures and all other resources provided by open tuition. God bless!

kami22 says

sir….u said that lower interest rate is used for when you are borrowing money and higher when you are depositing money…so in example 6 instead of using 5.2% you used 5.8%…can you explain why? or is it am i understanding this wrong…thank you

sheffernb says

I just love this man

kshearer says

Thank you was a great lecture , could not understand a thing in the text book.

jewel086 says

I am now 31 years old….I have done only 6 subject…am I too old to get a training job? I am confused…

sharman says

you’re simply too good with facts & number…I love you man!

accamani says

i can not hear it plz help me?

admin says

well, shall we make you an appointment with Otolaryngologist? 😀

arjunudayp91 says

if i get a chance i would kiss you …………..

jokes apart……… want to see knighted by the queen of england……………..u r a boon to students……guess what… i pay and get sub standard lectures…………………

admin says

Well, after exam, get to work 😉 I’m sure John would be surprised haha 😉

Good luck in December exams 😉

arjunudayp91 says

you can actually find the forward rate if u have the interest rates of the two countries…..:P