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Hi,
please I need clarification on the concept of reverse money market hedge as used in Asteroid. The question states that the subsidiary is expected to remit the equivalent of €1.5m, which I treated as a receipt to Asteroid, the parent company. However, the kit treated it using the offer rate of 1.6244 instead of the bid rate of 1.6239.As for Buryecs, a Eurozone based company, the receipt of $7,500m is hedged using a put option instead of a call option. The reason for using a call option is because the amount in question is a receipt and not a payment.
I look forward to hearing from you and I’m using the BPP revision kit.
Thank you in advance for your assistance.
In the case of Asteroid, the exchange rate is quoted as SFr per € and so the receipt in SFr is divided by the exchange rate to convert to €’s. Dividing by the higher rate results in fewer €’s, which must be the case (it is the banks who make the ‘profit’ out of the spread).
In the case of Buryecs, they buy a put option because they want the right to sell $’s at a fixed rate.
Have you watched my free lectures on foreign exchange risk management, because I do explain all of this in detail.
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