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…………………
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