For example 7, if the company has enough cash reserve (4.86 million pounds) to withdraw & convert to dollars and hence not requiring to borrow the money. The effective cost will only be the lost in interest gained from that amount for 3 months and the interest rate used should be the lower one (9.2%, for deposits) instead of 9.9%.

Is the above statement correct? and can this situation appear in the exam questions?

So John, from the above example, we assume the interest rate is calculated on a simple interest rate, that’s why we divide the annual rate directly to get the three months rate?

Furthermore, if it is required to use effective rate, will the examiner state it clearly??

So to reduce the Risk of changing rates we accept the fact that 1 they could change in our favour and 2 that we actually pay more interest due to difference in borrowing and depositing rates? Guess because the exchange fluctuations give higher cashflow differences? I cant see any other good reason otherwise. Really love this paper so far. Just want to fully understand.

The purpose of money market hedging is not to gain or lose money, but to effectively fix the exchange rate on a future date.

The end result of a money market hedge is that when you receive or pay the foreign currency on a future date, the equivalent home currency receipt or payment is fixed.

If we did not do it and just waiting to see what the spot rate was on the future date, then we would not be certain as to what the result would be, and this is why there would be risk.

If the examiner asks that which is cheaper option from the money market hedging or forward rates?
1. If we are receiving, then the higher we receive from any specific option, the better/cheaper it is.
2. If we are paying, then the lower we pay from any specific option, the better/cheaper it is.

Please confirm that the above two statements are correct for the answer. Thanks.

Secondly, in example 7 – the third step where we borrow £’s of £4,980,494 – could we not borrow enough so that when the interest is added on, we end up paying back exactly what we needed to borrow? For example, we borrow £4,980,494 less the interest, so then in 3 months time the borrowings plus the interest would equal the £4,860,206 we need to convert to deposit?

Dear Sir, I’ve gone through the questions and answers in case similar questions to mine were already asked and resolved, my question is partly similar to Sam and I refer to your comment on 08 May 2014 regarding example 7. Before coming to my question, i’d like to sum up abit. In example 6, there was a receivable in $ and we did the following which perfectly makes sense:

1. Borrow $ NOW
2. Convert to £ at today’s rate
3. Deposit £

In example 7, There’s a payable in $, but we changed the sequence of the above

1. Deposit $ NOW
2. Convert to $ to £ at today’s rate
3. Borrow £

I have 3 questions regarding this:

a) if the 1st step is to deposit $, from where does the company get that money? ( Does it already have it in hand?) if yes then they could very well convert £ to $ at today;s rate and deposit $ at a fixed rate, why the borrowing afterwards.

b) Assuming the company does not have the cash in hand, will it be sensible if we go exactly as per eg 6. We borrow to have the money first(in $), then we convert to £ and deposit to receive fixed interest. The reason i’m asking this is because if the company does not have cash how will it be able to make a deposit at the place prior to a borrowing.

c) In the exam, we assume the company is always UK based unless otherwise stated, correct?

The steps you have listed are correct, and in example 7 we do need to borrow GBP first in order to be able to convert to $’s in order to be able to deposit $’s.

However, you cannot calculate how many GBP you need to borrow, without first calculating how many $’s you need to invest. So as far as the calculations are concerned, we need to perform them in the order listed.

(I do suggest that you watch the lecture again, and think about what I have just written)

The question will always tell you what currency the company is using.

Dear John, I have a question. Its a simple one, but i am not been able to answer it myself. When converting $ 7,874,015 to Pounds. Why did you use the rate 1.6201 instead of 1.6283. As i recall your theory when we have to convert to pound we will use the rate which will give us the fewer pounds. Because bank makes the profit. So in this case we should use 1.6283 because it will give us fewer pounds. Please explain

In Example 7 why did we need the third step when we calculated the amount in dollars that we need to borrow and converted that into pounds at the spot rate so effectively we have avoided the risk of any future exchange rate movements.

You say that to avoid any payment of pounds today but we don’t have to pay today anyways.

In Example 7 they are not borrowing dollars – they are depositing them.

They need to buy dollars today in order to be able to deposit them. That means paying out pounds now in order to pay for the dollars.

Rather than pay out pounds now (when otherwise they wouldn’t be paying the supplies for 3 months) they borrow the pounds now and only repay in 3 months.

I have a doubt in example 7 if you could help.
In our first step when we had deposited “7,8874,016”, we had bought this amount of dollars from bank(am not sure if we buy from bank, but in lecture you said we buy the dollars and deposit them for 3 months), then we convert $ to pound after that we borrow the converted amount for 3 months. Now in 3 months time firstly we need to repay our borrowings of “4980494” and the customer will get $8M from our deposits.

As per this haven’t we paid twice? Once while buying the $ for depositing(which in turn customer will get) and secondly we will also need to repay the borrowings.

Okay, I think I got it, let me know if am wrong : We are basically calculating the amount that we need to borrow in the first step which is in dollar and then converting it into pound to get how much we need to borrow to deposit in the first step.

When we see a spot let’s say $/£ 1. 5384 – 1.5426 does it mean that £1 = $1. 5384 – $1.5426 sell or buy …. Having difficultly selecting the right rate everytime

The way I understand it is if we have an asset (which will be money coming in in 3 months time, we have to create a liability in the currency we will be receiving…..eg if we are expecting a payment 0f 300,000 pounds and we are in the US….if the pounds interest rate (borrowing) is 15% pa….we are going to borrow 289156.63…..(15/12 multiply by 3 = 3.75% – which is .0375 —-( 300,000 pounds divided by 1.0375 = 289156.63). We then convert to US at the spot rate and deposit for 3 months at the US deposit rate. At the end of the 3 months, we are owing exactly 300000 pounds.

I wanted to ask question but I was even confused on what to ask. By seeing this lecture and I am relating to pilot example.

Kindly let me know why you have divided the $300 000 / 1.7850, why not to multiply?
The other thing is that we are recieiving so it should be worst case for us, so why you didn’t take 1.7842?

This topic of risk management seems to be most tricky, not difficult.

1.7850$’s are equal to 1 £.
So to convert $300,000 to £’s, we need to divide by 1.7850.
Think about it – surely if it takes nearly $2 to get 1£, then the equivalent number of pounds must be less that the equivalent number of $’s!

We are receiving – yes – but if we divided by the lower rate then we would receive more! That cannot be the case 🙂

It is from the pilot paper. It is no longer available on the ACCA website, but if you say which Revision/Exam Kit that you have, then I will tell you where it is there.

now it’s all clear, cause if you looked at comments by claudia1 and hamzaharoon, they also thought that company has the $’s already and that what confused me.

Dear Sir,
May I ask you some question for example 6.
Borrowing- we pay interest $71,464 for 3 months($5,000,000 – $4,928536).
Deposit- we receive deposit interest £ 28,755(£ 3,223,709 – £3,194,954).
If I convert today spot rate £ 28,755/£ 1.5384 that will be $18,691. We lost $52,773 ($71,464 – $18,691).
I would like to know, if I invest convert amount £ 3,223,709 instead of deposit, let say I can get 1.45% or above in 3 months.
If so, can I invest that borrowed amount instead of deposit?
If so, why did this lecture say that have to deposit at the end?
Thanks.
May

The whole purpose of money market hedging is to remove the risk of exchange rate movements – the purpose is not to make profits.
Investing the money other than to get fixed interest (as we get by depositing) would introduce risk.

Sorry for asking about the same point that claudia1 and Hamzaharoon did ask about before

but what I understood from your lecture and your answer to their question is that:
yes we’re actually depositing and converting, but the whole idea of borrowing is to use this money for other investment purposes and not lose the chance of using the money deposited to pay out the supplier’s debt!, do you get what mean !?

Again, In example 7 question, why is it mentioned that “current 3 month interest rates” if the rates are yearly! or is it just to trick us !?

I am not sure I understand what you mean. If there were other investments and we needed money, we could always borrow the money anyway.

The whole point of borrowing and depositing is so that the eventual cash flow ends up at the same time as it would if we didn’t do any hedging at all, or if we used forward rates.
We can then compare the eventual cash flow for money markets with the eventual cash flow if we used forward rates,

With regard to ‘3 month interest rates’. Interest rates are always quote in the exam as yearly interest rates. However, the bank will offer (or charge) different yearly rates depends on how long the deposit (or borrowing) is for. For example, if you are borrowing for 3 months they might charge at the rate of 10% p.a., but if you were borrowing for 6 months they might charge 12% p.a.. This is what happens in real life.
(However, they will only actually charge it for 3 months or for 6 months. So if you are borrowing for 3 months and they are charging 10% p.a., the actual interest charged will be 3/12 x 10%)

the main point that confuses me is that in example 7, we are:
1_ depositing (this means we have the $’s already and we have deposited them for 3 months)

2_ Converting: to see how many £’s are they.

3_ Borrowing: which I couldn’t get the point of it as we have the money already and they are deposited so why would we be bothered to borrow more money and pay extra cost of interest when we have the $’s in the first place !!

if the sequence were like example 6 (Borrowing, converting and depositing) then there would be no problem in terms of “justifying the purpose of each step”. while “depositing, converting-which takes place now- and then borrowing” didn’t get through and it seemed to me pointless to borrow more money!

with regards to the “three months rate” it is now clear.

Hello John! Trying to understand where the deposit came from! Is it that instead of paying the money early (they had the money in hand) it was deposited to earn an interest? In step (2) was the conversion purely theoretical to ascertain the present value of the deposit converted into pounds and then that amount is borrowed now for 3 mths in pounds. In 3 months the $ deposit matures to 8 m and this is used to pay debt! What about the amount borrowed in pounds?

Sir I Do have the same question which Claudia asked! Please do Explain I also cannot understood why we borrow at step 3 and why we invest at step 1? Do we have Cash in hand at firs? I Understood the Previous question but not this one I am Confused!!!Please Explain 🙁

Please ask questions in the F9 Ask the Tutor Forum if you want me to answer – I cannot always read the comments under lectures because there are so many.

I assume you are asking about example 7.

The whole idea of money market hedging is to convert money today at todays spot. There is no point in converting money now and paying the supplier immediately because payment is not required until 3 months from now.

So…..we borrow £’s now, convert now at spot to $’s, and then deposit the $’s for 3 months to earn interest.

However, there is no point in buying $8M dollars now because in 3 months time it will have earned interest and we will have more than we need.

So we calculate how many we need to deposit so that it will have grown to $8M in the 3 months.

Having calculated it we then pay £’s to buy that many $’s.

Instead of having to pay out £’s now (when otherwise we would not be paying out until 3 months from now) we borrow £’s for 3 months.

So…..the net cash flow now is zero (we borrow, convert, and deposit). The only real cash flows are in 3 months time – we pay out £’s to repay the borrowing, and the $ deposit matures and pays off the supplier.
The actual cash flows occur in 3 months time (just as they would have done if we had made a direct payment in 3 months) but it is a fixed amount – what happens to the exchange rate in 3 months is completely irrelevant.

(Claudia says that the conversion is theoretical – not at all. We borrow, we actually convert, and we deposit.)

In the middle of the Lecture, the person starts discussing a exam question on Money Market Hedge and Forwards, does anyone know where does he get that question from? I couldn’t find it in the relevant class notes.

Prince says

Hi John,

In Eg 7, will we always work backwards when paying money in money market hedging?

John Moffat says

Yes 🙂

YuSheng says

Hi John,

For example 7, if the company has enough cash reserve (4.86 million pounds) to withdraw & convert to dollars and hence not requiring to borrow the money. The effective cost will only be the lost in interest gained from that amount for 3 months and the interest rate used should be the lower one (9.2%, for deposits) instead of 9.9%.

Is the above statement correct? and can this situation appear in the exam questions?

Regards,

YuSheng

John Moffat says

You are correct, but it doesn’t appear in exam questions 🙂

Virakbuth says

So John, from the above example, we assume the interest rate is calculated on a simple interest rate, that’s why we divide the annual rate directly to get the three months rate?

Furthermore, if it is required to use effective rate, will the examiner state it clearly??

thank in advance….

John Moffat says

For money market hedging we use the interest as calculated in the lecture.

Rachel says

So to reduce the Risk of changing rates we accept the fact that 1 they could change in our favour and 2 that we actually pay more interest due to difference in borrowing and depositing rates? Guess because the exchange fluctuations give higher cashflow differences? I cant see any other good reason otherwise. Really love this paper so far. Just want to fully understand.

John Moffat says

The purpose of money market hedging is not to gain or lose money, but to effectively fix the exchange rate on a future date.

The end result of a money market hedge is that when you receive or pay the foreign currency on a future date, the equivalent home currency receipt or payment is fixed.

If we did not do it and just waiting to see what the spot rate was on the future date, then we would not be certain as to what the result would be, and this is why there would be risk.

Salman says

If the examiner asks that which is cheaper option from the money market hedging or forward rates?

1. If we are receiving, then the higher we receive from any specific option, the better/cheaper it is.

2. If we are paying, then the lower we pay from any specific option, the better/cheaper it is.

Please confirm that the above two statements are correct for the answer. Thanks.

John Moffat says

The examiner won’t use the word ‘cheaper’ but could use the word ‘better’, in which case what you have written is correct.

Danielle says

Hi John,

Firstly, thank you for your lectures.

Secondly, in example 7 – the third step where we borrow £’s of £4,980,494 – could we not borrow enough so that when the interest is added on, we end up paying back exactly what we needed to borrow? For example, we borrow £4,980,494 less the interest, so then in 3 months time the borrowings plus the interest would equal the £4,860,206 we need to convert to deposit?

Or am I missing the point?

Danielle

John Moffat says

You are missing the point. If we did that then we wouldn’t be able to convert enough now (which would leave us exposed to exchange rate risk).

H says

Thank you. The lecture is perfectly clear and you make it so understandable.

I’m actually really enjoying F9!

John Moffat says

Thank you for the comment 🙂

nzeadall says

Dear Sir, I’ve gone through the questions and answers in case similar questions to mine were already asked and resolved, my question is partly similar to Sam and I refer to your comment on 08 May 2014 regarding example 7. Before coming to my question, i’d like to sum up abit. In example 6, there was a receivable in $ and we did the following which perfectly makes sense:

1. Borrow $ NOW

2. Convert to £ at today’s rate

3. Deposit £

In example 7, There’s a payable in $, but we changed the sequence of the above

1. Deposit $ NOW

2. Convert to $ to £ at today’s rate

3. Borrow £

I have 3 questions regarding this:

a) if the 1st step is to deposit $, from where does the company get that money? ( Does it already have it in hand?) if yes then they could very well convert £ to $ at today;s rate and deposit $ at a fixed rate, why the borrowing afterwards.

b) Assuming the company does not have the cash in hand, will it be sensible if we go exactly as per eg 6. We borrow to have the money first(in $), then we convert to £ and deposit to receive fixed interest. The reason i’m asking this is because if the company does not have cash how will it be able to make a deposit at the place prior to a borrowing.

c) In the exam, we assume the company is always UK based unless otherwise stated, correct?

John Moffat says

The steps you have listed are correct, and in example 7 we do need to borrow GBP first in order to be able to convert to $’s in order to be able to deposit $’s.

However, you cannot calculate how many GBP you need to borrow, without first calculating how many $’s you need to invest. So as far as the calculations are concerned, we need to perform them in the order listed.

(I do suggest that you watch the lecture again, and think about what I have just written)

The question will always tell you what currency the company is using.

nzeadall says

ok thank u sir

Shaina says

For example 7, are we borrowing the money in 3 months or are we borrowing the money now and re-paying in 3 months?

hsohail says

Dear John, I have a question. Its a simple one, but i am not been able to answer it myself. When converting $ 7,874,015 to Pounds. Why did you use the rate 1.6201 instead of 1.6283. As i recall your theory when we have to convert to pound we will use the rate which will give us the fewer pounds. Because bank makes the profit. So in this case we should use 1.6283 because it will give us fewer pounds. Please explain

John Moffat says

Because we are buying dollars and therefore paying our pounds. Using the lower rate means it costs us more pounds.

Arun says

Hi John,

In Example 7 why did we need the third step when we calculated the amount in dollars that we need to borrow and converted that into pounds at the spot rate so effectively we have avoided the risk of any future exchange rate movements.

You say that to avoid any payment of pounds today but we don’t have to pay today anyways.

Thanks.

John Moffat says

In Example 7 they are not borrowing dollars – they are depositing them.

They need to buy dollars today in order to be able to deposit them. That means paying out pounds now in order to pay for the dollars.

Rather than pay out pounds now (when otherwise they wouldn’t be paying the supplies for 3 months) they borrow the pounds now and only repay in 3 months.

Priyanka says

Hello John,

I have a doubt in example 7 if you could help.

In our first step when we had deposited “7,8874,016”, we had bought this amount of dollars from bank(am not sure if we buy from bank, but in lecture you said we buy the dollars and deposit them for 3 months), then we convert $ to pound after that we borrow the converted amount for 3 months. Now in 3 months time firstly we need to repay our borrowings of “4980494” and the customer will get $8M from our deposits.

As per this haven’t we paid twice? Once while buying the $ for depositing(which in turn customer will get) and secondly we will also need to repay the borrowings.

Priyanka says

Okay, I think I got it, let me know if am wrong : We are basically calculating the amount that we need to borrow in the first step which is in dollar and then converting it into pound to get how much we need to borrow to deposit in the first step.

John Moffat says

That is correct 🙂

beautyashma says

In example 7 I do not understand why 1.6201 was used instead of 1.6283. Since we are buying dollars wouldn’t it cost me less pounds.

I hope my question is understandable

beautyashma says

When we see a spot let’s say $/£ 1. 5384 – 1.5426 does it mean that £1 = $1. 5384 – $1.5426 sell or buy …. Having difficultly selecting the right rate everytime

John Moffat says

If you watch the first lecture on foreign exchange risk management, I spend a long time explaining which exchange rate to use, and why.

aurore says

Hello,

I seem to be having an issue with the spot rate to choose.

In this example, don’t we need to sell dollar when calculating the (now)value in pounds?

Please do advise me. I did get previous work examples right so I am a bit confused here.

John Moffat says

You do not say which of the examples in this lecture you are referring to!!

In the first example, we want to put $’s on deposit and so we need to buy $’s now in order to be able to.

aurore says

Ah ok. I’ve got it.

It was example 7. sorry.

Thank you very much!

sajlasalisbeajar says

can u explain about futures ?

John Moffat says

I can and I do!!!

Why don’t you watch the remaining lectures on foreign exchange risk 🙂

Salauddin says

I did not find the exam question in the lecture notes. could you please help me to find?

John Moffat says

The first example is Example 7 on page 126 of the Lecture Notes.

The second one is an old exam question that I am afraid is no longer available on the ACCA website.

jeffrey says

where is the exam question that u did in the video lecture plz?? i cant find it in the lecture notes!!

John Moffat says

That is correct, although I do not know why you have typed this 🙂

It is just repeating what is in the lecture.

claudia1 says

The way I understand it is if we have an asset (which will be money coming in in 3 months time, we have to create a liability in the currency we will be receiving…..eg if we are expecting a payment 0f 300,000 pounds and we are in the US….if the pounds interest rate (borrowing) is 15% pa….we are going to borrow 289156.63…..(15/12 multiply by 3 = 3.75% – which is .0375 —-( 300,000 pounds divided by 1.0375 = 289156.63). We then convert to US at the spot rate and deposit for 3 months at the US deposit rate. At the end of the 3 months, we are owing exactly 300000 pounds.

bakarsaid says

where is the question which u are answering sir

bakarsaid says

i have bpp exam kit

acca2050 says

I wanted to ask question but I was even confused on what to ask. By seeing this lecture and I am relating to pilot example.

Kindly let me know why you have divided the $300 000 / 1.7850, why not to multiply?

The other thing is that we are recieiving so it should be worst case for us, so why you didn’t take 1.7842?

This topic of risk management seems to be most tricky, not difficult.

Many Thanks

John Moffat says

1.7850$’s are equal to 1 £.

So to convert $300,000 to £’s, we need to divide by 1.7850.

Think about it – surely if it takes nearly $2 to get 1£, then the equivalent number of pounds must be less that the equivalent number of $’s!

We are receiving – yes – but if we divided by the lower rate then we would receive more! That cannot be the case 🙂

acca2050 says

which question you referring to after example7?? man I am getting mad!

John Moffat says

It is from the pilot paper. It is no longer available on the ACCA website, but if you say which Revision/Exam Kit that you have, then I will tell you where it is there.

John Moffat says

No we didn’t have the $’s already. If we already had them then there would be no point in any of it!!!

We need to buy $’s. If we want we can simply wait 3 months and buy them, but there is then the risk of the exchange rate having changed.

To avoid it we buy the $’s now at todays exchange rate.

How can we afford to buy them? We borrow £’s now so that we can afford to buy the $’s.

Now we have the $’s, but there is no point in paying the supplier immediately. So….we put them on deposit and pay him in three months.

Sam says

now it’s all clear, cause if you looked at comments by claudia1 and hamzaharoon, they also thought that company has the $’s already and that what confused me.

anyway, thank you very much indeed for your help

Regards

John Moffat says

You are welcome 🙂

May says

Dear Sir,

May I ask you some question for example 6.

Borrowing- we pay interest $71,464 for 3 months($5,000,000 – $4,928536).

Deposit- we receive deposit interest £ 28,755(£ 3,223,709 – £3,194,954).

If I convert today spot rate £ 28,755/£ 1.5384 that will be $18,691. We lost $52,773 ($71,464 – $18,691).

I would like to know, if I invest convert amount £ 3,223,709 instead of deposit, let say I can get 1.45% or above in 3 months.

If so, can I invest that borrowed amount instead of deposit?

If so, why did this lecture say that have to deposit at the end?

Thanks.

May

John Moffat says

The whole purpose of money market hedging is to remove the risk of exchange rate movements – the purpose is not to make profits.

Investing the money other than to get fixed interest (as we get by depositing) would introduce risk.

May says

Thank you Mr Moffat.

May.

John Moffat says

You are welcome 🙂

Sam says

Hi Mr John,

Sorry for asking about the same point that claudia1 and Hamzaharoon did ask about before

but what I understood from your lecture and your answer to their question is that:

yes we’re actually depositing and converting, but the whole idea of borrowing is to use this money for other investment purposes and not lose the chance of using the money deposited to pay out the supplier’s debt!, do you get what mean !?

Again, In example 7 question, why is it mentioned that “current 3 month interest rates” if the rates are yearly! or is it just to trick us !?

John Moffat says

I am not sure I understand what you mean. If there were other investments and we needed money, we could always borrow the money anyway.

The whole point of borrowing and depositing is so that the eventual cash flow ends up at the same time as it would if we didn’t do any hedging at all, or if we used forward rates.

We can then compare the eventual cash flow for money markets with the eventual cash flow if we used forward rates,

With regard to ‘3 month interest rates’. Interest rates are always quote in the exam as yearly interest rates. However, the bank will offer (or charge) different yearly rates depends on how long the deposit (or borrowing) is for. For example, if you are borrowing for 3 months they might charge at the rate of 10% p.a., but if you were borrowing for 6 months they might charge 12% p.a.. This is what happens in real life.

(However, they will only actually charge it for 3 months or for 6 months. So if you are borrowing for 3 months and they are charging 10% p.a., the actual interest charged will be 3/12 x 10%)

Sam says

the main point that confuses me is that in example 7, we are:

1_ depositing (this means we have the $’s already and we have deposited them for 3 months)

2_ Converting: to see how many £’s are they.

3_ Borrowing: which I couldn’t get the point of it as we have the money already and they are deposited so why would we be bothered to borrow more money and pay extra cost of interest when we have the $’s in the first place !!

if the sequence were like example 6 (Borrowing, converting and depositing) then there would be no problem in terms of “justifying the purpose of each step”. while “depositing, converting-which takes place now- and then borrowing” didn’t get through and it seemed to me pointless to borrow more money!

with regards to the “three months rate” it is now clear.

many thanks Mr John

Regards

Sam

tejot says

http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/pilotPaper.pdf

claudia1 says

Hello John! Trying to understand where the deposit came from! Is it that instead of paying the money early (they had the money in hand) it was deposited to earn an interest? In step (2) was the conversion purely theoretical to ascertain the present value of the deposit converted into pounds and then that amount is borrowed now for 3 mths in pounds. In 3 months the $ deposit matures to 8 m and this is used to pay debt! What about the amount borrowed in pounds?

hamzaharoon says

Sir I Do have the same question which Claudia asked! Please do Explain I also cannot understood why we borrow at step 3 and why we invest at step 1? Do we have Cash in hand at firs? I Understood the Previous question but not this one I am Confused!!!Please Explain 🙁

John Moffat says

Please ask questions in the F9 Ask the Tutor Forum if you want me to answer – I cannot always read the comments under lectures because there are so many.

I assume you are asking about example 7.

The whole idea of money market hedging is to convert money today at todays spot. There is no point in converting money now and paying the supplier immediately because payment is not required until 3 months from now.

So…..we borrow £’s now, convert now at spot to $’s, and then deposit the $’s for 3 months to earn interest.

However, there is no point in buying $8M dollars now because in 3 months time it will have earned interest and we will have more than we need.

So we calculate how many we need to deposit so that it will have grown to $8M in the 3 months.

Having calculated it we then pay £’s to buy that many $’s.

Instead of having to pay out £’s now (when otherwise we would not be paying out until 3 months from now) we borrow £’s for 3 months.

So…..the net cash flow now is zero (we borrow, convert, and deposit). The only real cash flows are in 3 months time – we pay out £’s to repay the borrowing, and the $ deposit matures and pays off the supplier.

The actual cash flows occur in 3 months time (just as they would have done if we had made a direct payment in 3 months) but it is a fixed amount – what happens to the exchange rate in 3 months is completely irrelevant.

(Claudia says that the conversion is theoretical – not at all. We borrow, we actually convert, and we deposit.)

blanka says

guys can you help me pls. None of the lectures work for me, it says that the opentution server is not available

admin says

Your PC or network is behind a firewall

Please contact your Internet provider to help you

DLS says

In the middle of the Lecture, the person starts discussing a exam question on Money Market Hedge and Forwards, does anyone know where does he get that question from? I couldn’t find it in the relevant class notes.

Thanks

DLS says

@DLS, Ok found it, its from F9 Pilot Paper.

khizer03 says

cant view the full lecture. The video stops playing. Any help??

atiq422 says

where is the exam question? the one moffet is doing?

John Moffat says

@atiq422, It is question 2 of the Paper F9 pilot paper.

sweety22 says

sir where can i find the pilot paper?

John Moffat says

@sweety22, You can download it from the ACCA website

tiney says

Hi mr. moofatt isn’t the 1month receipt fiqure $240,000.00

gracetsiga1 says

is not forward rate you used not wrong, i thought it is meant to be 1.7850+0.0004=1.7854. are you then not meant to say $300 000/1.7854?

John Moffat says

@gracetsiga1, No – the forward rate is 1.7846 + or – 0.0004

So the relevant rate in this example is 1.7846 + 0.0004 = 1.7850

John Moffat says

@gracetsiga1, The example is question 2 of the F9 Pilot paper.

gracetsiga1 says

Which past paper are you using Mr Moffat please?

abiw2012 says

where is the source of examiners question please?

John Moffat says

@abiw2012, The question is example 2 of the F9 pilot paper.

Ammar.Shabbir says

which ppr is this Qs from???

eunice says

great stuff,

Thx

flowermist says

Awesome explanation and its made so clear…thanks…

slik says

The audio isn’t synced properly with the audio, but hey ! its free and it’s great !