[faisal1990]

@dennis98 said:
Was this the first ever foreign currency hedging question where you are given the contracts in the foreign currency (euros) as opposed to the home currency (dollars) ? I think this meant that when calculating the number of contracts there was no conversion to be done as the figures were already in euros. And likewise for the gain/loss on the futures and the premium for the options there was no conversions to be done as the figures were already in dollars?

True, the currency wasn’t supposed to be converted before calculating no of contracts.

However when calculating the premium you had to convert because the premium prices were given in Cents. i.e Home currency.

[faisal1990]

@jeffrey1989 said:
In terms is of Q3 – did it ask to just set up the hedges in relation to FRA,Futures and Options not to show the result of the hedges?

Might be wrong here but I just set up the hedges using the three questions for Futures and Options,

1, Buy or Sell
2. how many conts
3. which date

Am I on the right lines or have I missed something?

Also thought the discussion section was worded funny – found it difficult to ascertain what they were after.

So i describes the benefits of using derivatives to reduced Forex risk and then I described the difference between treasury and finance department and the benefits or having the sep department. My writing by this point was horrific though due to tiredness – hope this can be overlooked.

Additionally i would advise anyone to tackle section B first as section one is very time consuming and can bog you down from collecting easier marks on shorter questions when you are fresh.

Not sure for the question about setting up or actually hedging, I did the whole calculations doing the premium for options, the tick size, and the cost of hedge.

I found the part b of Q3 to be worded funny too, and ended up taking assumptions and other risks, but later figured it was actually asking about basis risks and the over and under hedging.

[faisal1990]

@sam04071989 said:
It was a dollar receip

Question 3
Think I misread the question.

The hedge was related to a 20.56m Euro receipt in 3 months time. You decide to buy or sell wrt the contract currency. Contract currency was in Euros therefore you would want to translate the receipt into dollars (buy dollars) hence sell the Euro contract currency. Surely this would be go short on the futures contract (sell futures)? Similarly this would be a put for the options, no?

Got forward as best rate to use and then explained if the rate had increased above 1.3500 to c1.3600 or 1.3700 (they gave the indirect rates and direct rates, so I just converted them so they were all comparable and consistent: (Direct rate = 1/indirect rate)) then this would have made the option worthwhile as the premium paid would have been outweighed by the exercised option. Think I may have got confused in the heat of the exam as a result of the contracts being put compared with many example calls in the question banks.

I did the same for Q3 contract size was denominated in euros therefore it was sell futures now and buy later at the date of the spot transaction in 3 months time had to calculate the futures price using the basis i guess. did any one else did the same thing?

For options it was put options since we had to sell the euro contracts.

What did you guys make of the part b of this question?

[faisal1990]

Harriet88 i did almost the same for question 1 but only did it till the premium bit, spend way too much time on Q1 to be fair.

What was the requirement for Question 3 part b? under time pressure got me really confused.

[faisal1990]

How was the merger value calculated any suggestions?

[faisal1990]

Is it not true that the interest rates are not the predictor of forward rates? i.e we can not use them to predict the forward rate?

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