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hi sir
see title for question
the number of contracts in 46.03. this is not a perfect hedge so we round down to 46.
our expected receipt is 46x 125000CHF= 5750000. but we have under hedged by 6450000- (1.1210 x 46 x 125000) = $4250
we hedge this on the forward market since we can work out the forward rate with the interest rates available(investing or borrowing).
In the Kaplan answer book, they do not acknowledge this and simply divide by the lock in rate (1.1210 as above). I know the rounding is marginal but strictly if it is not a perfect hedge in other questions, we should always try to hedge this on the forward market? am I correct? why does the marker not acknowledge this?thanks for all your lectures and help.
I do not have the Kaplan kit, although I do have the original exam question and the examiners answer.
The examiners own answer does not consider the under-hedge, probably because the amount is so very small and would not affect the recommendation anyway, regardless of whether forward rates were used on the under hedge or whether this amount was simply left at risk and converted at whatever the spot rate turned out to be.
I would have mentioned it (and usually it is a bit more significant in exam questions), but even when it is considered it usually only carries 1 mark (I/2 mark for mentioning it, and 1/2 mark for showing the calculation).
Appreciate that the question asks for advice and a recommendation (obviously with relevant calculations to support the advice).
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