[iq2k16]

Thanks John 🙂

[iq2k16]

Thanks John 🙂

[iq2k16]

Thanks John 🙂

[iq2k16]

Thank you John!

Yes the English has been really bad in some of the previous exams i wrote as well. I feel the examiner is doing it to confuse us 🙁

[iq2k16]

Just 1 more question

In such cases , how do we calculate the hedge effectiveness? there is no gain in any market..

is it 0 as the hedge has totally gone wrong?

[iq2k16]

Hi John

I was going through Dec 2013 Q.2 AwanCo and happened to read a similar line. The last line of the question states ” Assume there is no basis risk”

But the examiners answer shows a basis of 1.15 initially which then reduces to 0.45 🙁

What exactly do they mean by ”no basis risk” then ?

[iq2k16]

yes you are right! I have got the same answer as the examiner (basically same lock-in rate) even though I assumed a different spot rate.

Only thing what confused me was making a loss in both markets as my understanding so far was that we would make a gain in 1 market if we made a loss in the other

Thanks again John 🙂

[iq2k16]

Thanks you John 🙂

[iq2k16]

@johnmoffat said:
The basis risk is the fact that the basis changes over time.

If there is no basis risk, it means that the basis does not change and therefore remains at 0.18.

I thought this way as well after seeing your lecture ”Lock-in Rate” . The basis was initially 0.54 on 1/Jan/2012

Transaction date 1/May/2012-June Future- BPP answer shows unexpired basis as 0.18(2/6*0.54)- Shouldn’t it be 0.54 if the company didn’t face any basis risk?

[iq2k16]

@johnmoffat said:
We always start the futures deal by buying or selling futures in the same way as the transaction is buying or selling futures.

Since the transaction is receiving $’s and therefore selling $’s to convert, and since the contract currency of the futures is $’s, we will start the deal by selling $ futures and then buying them back later. So here, there is a gain on the futures because the buy price in 4 months time is lower than the current price.

(Had the transaction involved buying $’s (because we were having to pay dollars) then the futures deal would have been to buy $ futures now and sell them later)

The contract currency is Euro not $ -which is why I took it as buy now and sell after 4 months.

Not sure where I am going wrong 🙁

[iq2k16]

b) question asks ‘ Based on the three hedging choices Alecto Co is considering and assuming that the company does not face any basis risk, recommend a hedging strayegy’

What is meant by assuming the company does not face any basis risk here?

The answer does take into acc the basis of 0.18

[iq2k16]

@hanhvn said:
Dear Mr Moffat,

Question Casasophia part a, using future contracts to hedge against the weakness of USD20 mil. received in 4 months. The hedge is as follows:

We need to buy 117 contracts (rounding from 116.8 which indicates there is an overhedged amount).

Spot now = 1.3618
Spot in 4 months = 1.3623

This implies a loss due to the adverse change of the exchange rate for the company, and so I expect a gain in the futures market to compensate the loss of the exchange rate movement.

However, the futures market shows a loss:

Buy futures now at 1.3698
Sell futures in 4 months at 1.3639

I find it is similar the case for question Polytot-BPP where the futures market shows a gain and the underlying asset also moves favourably.

Please would you let me know where I am wrong in understanding this area? Besides, do we have to calculate the over/underhedged amount ?

Many thanks,

Hanh

Having the exact same doubt regarding the Casasophia question.I read your answer but still unclear .

I also assumed the spot rate after 4 months to be the 4month forward rate.

Spot market

Spot now $1.3618
Spot after 4 months $1.3623

Dollar has weakened in the spot market , so we are making a loss as we are dividing 20m now by a bigger number (1.3623 vs 1.3618) in the spot market as we are recieving $

Futures Market

I see we are making a loss here as well

We buy @ 1.3698
We sell @ 1.3639 (spot after 4 months + closing basis=1.3623+0.0016)
Loss of 0.0059

We are making a loss in both the markets.

Would you please help me with me with this

[iq2k16]

@Ehsan @trephena

You have got me wrong. I do know how to reference and have done it rightly so far in my project. This particular issue is a bit different.Let me try explaining with the examples you gave:

As per your example you have 2 articles from ABC NEWS.Lets say you dont have date(year) for both the articles. So if you citing this using MS Word, both would come up as (ABC NEWS,n.d.). No unique designator this way for 2 different articles 🙁

How can you differentiate the two now ? Do you manually go and change them to (ABC NEWS,n.d,a) and (ABC NEWS,n.d,b)

[iq2k16]

@trephena @Ehsan

I have read your golden rules of referencing where it states each document referred must have its own unique designator.

However I have taken most of my accounting ratios from Financial Times Lexicon and while referencing using MS WORD its all giving me the same in text citation even for different web pages.

For Example :
ROCE : https://lexicon.ft.com/Term?term=return-on-capital-employed–ROCE
Gearing : https://lexicon.ft.com/Term?term=gearing

Both when referenced using MS WORD in Harvard style gives (Financial Times, n.d.). I used Financial Times as the corporate author and was not able to find any year for it. As there is no year-how is it possible to differentiate it using a,b,c ?

Any advice?

[iq2k16]

@trephena said:

@iq2k16 – in principle that sounds fine. You will need to justify your choice and show that you are using the data to make useful comparisons setting out the limitations of your approach. You might need to use the group data when it comes to share price and earnings per share (also possibly gearing too) as you should try to have some investor ratios but briefly explain the basis behind your calculations. It is often the trends in the data that are important and of course what has driven the ratios. As these underlying reasons behind the figures are what are really important focus on strengthening the links with models when doing the evaluation of the main company.

Noted!Thanks 🙂

[iq2k16]

Hi @trephena

I am doing Topic 08.I have chosen a local telecom company (not a group company). However the company I choose for comparison is a group company-I choose this company as its the only competitor since telecom market in my country is duopoly.So the issue is , the competitor has consolidated statements only but they do have IFRS08 notes and operational highlights for their operations in my country with various information such as NP,EBITDA,CAPEX,Revenue which are specific to my country. I decided to use these information for my RAP and ignore the consolidated results as it seems pointless to compare their operations outside my country.

Am I doing this right or is there any problem?

[Author]

Posts