OpenTuition | ACCA | CIMA
Free ACCA and CIMA on line courses | Free ACCA, CIMA, FIA Notes, Lectures, Tests and Forums
Sign up with YouTube premium to watch our lectures Ad-free and download them to watch offline.
Specially for OpenTuition students
May 5, 2021 at 7:32 am
John, I just have a tiny question. In the examples that you’ve given, the question mentions that the interest rates are “current 3 month interest rates” so why do you multiply that by 3/12 again?
John Moffat says
May 5, 2021 at 7:50 am
Interest rate are always quoted as yearly rates. The yearly rate offered will be different for different lengths or borrowing or depositing. For example, a bank may give interest at the rate of 5% per year if you deposit for 3 months, but might give interest at the rate of 6% per year if you deposit for 6 months. This is how interest rates are quoted in real life as well as in exams.
May 5, 2021 at 8:37 am
Ohh that makes sense now. Thank you so much for clearing that up! 🙂
February 14, 2021 at 3:37 pm
Dear Mr. Moffat,
Thank you for your lectures they are of utomst help.
I understand this concept when receiving money but when paying such as in example 7 what about borrowing in the currency one would have to poy in the future now? (Borrwing less ammount deposit it and then it would mature to the ammount due)
February 15, 2021 at 7:05 am
That is effectively what we do 🙂
February 9, 2021 at 4:33 pm
will it wrong in example 7
When i put it this way,then start with deposit now
2.Covert to spot
December 7, 2020 at 8:23 pm
I have a question, how we will use the home currency rates given in Money market hedging. Like in example 6&7 UK LIBOR rates(in percentage) are given how we will decide which one and when to use, lower rate or higher rate e.g in example 7 you have used 9.9% instead of 9.2% and in example 6 you have choose 3.6% instead of 3.9% .how t decide which one to choose.?
December 8, 2020 at 8:38 am
The lower rate applies if we are depositing money, the higher rate applies if we are borrowing money (the banks make their profits because of the difference 🙂 )
December 8, 2020 at 10:26 am
Thank you sir for our answer.
I have another question , you calculated backwards while calculating deposit(payment) using money market Hedging . Can we calculate it in same way as we calculated Money market hedging receiving income?
December 8, 2020 at 10:29 am
Sir in example 6 of money market hedging Reciepts calculation you used 3.6% instead of 3.9%,why?as we can see 3.6% is lower than 3.9% and while receiving currency we use LOWER RATE. Kindly explain.
And in example 7 you used 9.9% instead of 9.2% ,why?
December 8, 2020 at 2:58 pm
No we can’t. We need to work backwards to determine how much money we need to deposit and therefore how much to borrow and convert.
In example 6 we borrow $’s (so at the higher $ interest rate) and deposit Pounds (so at the lower Pound interest rate).
In example 7 we borrow Pounds (so at the higher Pound interest rate) and deposit $’s (so at the lower $ interest rate).
December 9, 2020 at 2:37 pm
In INTEREST RATE PARITY or PURCHASE POWER PARITY formula what is the 1st currency means, which currency is first currency we will consider?
December 9, 2020 at 2:46 pm
This has nothing to do with money market hedging and is explained in my lectures on “forecasting foreign currency exchange rates”.
December 6, 2020 at 2:47 pm
I have similar question on the spot rate for example 7. Normally we convert the spot rate which give us lesser amount, so should be using 1.6283? Or because we work backward, so we chose the spot rate also at opposite way?
December 6, 2020 at 3:42 pm
We are paying money (not receiving) and therefore use the rate that means we pay the bigger amount.
December 7, 2020 at 2:50 am
Thank you so much for clearing my doubt! Appreciate it!
December 7, 2020 at 8:01 am
You are welcome 🙂
August 28, 2020 at 6:43 pm
If we need to Borrow (in example 6) $ 5 Million then what about the interest that we have to pay on the amount.Why did you not consider it to be relevant for the Question or Foreign Exchange risk at all.?
Thanks for the lecture.
August 29, 2020 at 8:43 am
But we didn’t borrow $5M. We borrowed $4,928,536 so that when the interest on that amount is added on we will owe $5M and the receipt will repay the borrowing including the interest.
July 31, 2020 at 2:52 am
For example 7, after all the calculation, if I have this kind of question in the exam, on the answer sheet Can I conclude and write down that ” Q need to deposit 4,980,494 pounds into the bank today to have $8,000,000 to pay in 3 months.”
I don’t know what to conclude because the question is “Show how Q can use the money markets to hedge the risk”.
Thank you so much!!!
July 31, 2020 at 9:06 am
The example is a lecture example so that I can show how we use the money markets. In the exam questions on this would be in Sections A or B and so you will not be typing anything – the question will state what numbers are required.
You will find plenty of examples of how it can be asked in the exam in your Revision Kit.
March 5, 2020 at 10:13 am
It’s one day before the exam and still i can wrap my head around this area of the syllabus, so am just gonna go ahead and hope it won come up.
February 11, 2020 at 7:05 pm
Thank you for a great lecture, again.
Quick question on Example 7.
– Conversion: why convert at spot is 1.6201 instead of 1.6283. Thus the company has to sell dollars and buy £ to invest them, I thought, in this case, we should use 1.6283.
many thanks Anna
February 12, 2020 at 6:55 am
No – we are buying $’s so that we can put them on deposit and have enough in 3 months so as to be able to pay the $’s that we owe,
February 12, 2020 at 3:41 pm
thank you, a got a little confused.
January 30, 2020 at 6:47 pm
Hello Mr Moffat
Thank you for your lecture in first place 🙂
I do not understand one thing we borrowing dollars and we pay interest but all of the sudden we have to borrow less than we originally needed i thought that it should be in this way $5m x 1.0145
why do we divide it ?
January 30, 2020 at 10:34 pm
We borrow less than we will need on the future date because by the time we need the money it will have earned interest and so there will be more available.
September 1, 2019 at 3:15 pm
Instead of borrowing money, could we convert today using spare cash then deposit the dollars, which would save us paying any interest?
September 1, 2019 at 4:14 pm
But you would then be losing interest you could have been earning on the spare cash 🙂
June 25, 2019 at 7:29 pm
this type of market hedging questions is important in exam ?
May 20, 2019 at 3:41 pm
If we have to receive the $5m in example 6. Why are we borrowing $ in the first place?
May 20, 2019 at 5:54 pm
In order to be able to convert at todays exchange rate instead of taking the risk of waiting and the exchange rate changing.
I do suggest that you watch the lecture again.
You must be logged in to post a comment.