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May 17, 2016 at 1:29 am
Ok, thank you Mr. John
May 11, 2016 at 2:17 am
What would have being different should the part (a) of the question said that Rose Co does have surplus cash to use in hedging the future euro receipt?
John Moffat says
May 11, 2016 at 6:49 am
It would be of no real relevance except that she could maybe have avoided borrowing for the money market hedge. It would never be the case in the exam.
May 16, 2016 at 5:11 am
Thank you Mr. John,
Though by avoiding to borrow that means that we’d be converting at spot straight up €750.000 and a money market hedge would be preferable rather than a forward market hedge.
Money market hedge Convert at spot €750.000 / 2,349 = $319.285 Deposit said $319.285 for a duration of 6 months time (x 1.01) = $322.478
Forward market hedge Convert in 6 months time €750.000 / 2,412 = $310.945
Though to be honest I don’t see how this can be considered hedging since it is simply a deposit note in foreign currency, Rose Co is still getting that €750.000 by the end of 6 months. So its $322.478 + $310.945 in 6 months
Am I off somewhere or am I completely off the planet?
May 16, 2016 at 7:59 am
Again, with money market hedging in the exam you would always borrow, convert, and deposit. The whole point of money market hedging is to not be at any risk of the final receipt being uncertain because of uncertainty as to the future sport rate.
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