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).

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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 🙂