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Hello Sir,
Hope you are well. In question 272 of the BPP text book I followed how we did it in the lectures (money market hedging – example 7) and got the completely wrong answer. I think I know why but would just like to confirm if possible please:
Here is the Answer to Example 7 :
Invest $’s: 8M ÷ 1.0116 = 7,874,016
Convert at spot: 7,874,016 ÷ 1.6201 = £4,860,204
Borrow £’s = 4,860,204 × 1.02475 = £4,980,494In example 7, we were in the UK and paying Dollars. The first currency on the spot rate was Dollars, so when converting at spot we had to buy dollars.
In BPP 272, we are in the US and paying Euros. The first currently on the spot rate was dollars, so when converting at spot we had sell dollars.
In example 7, we had to divide by the spot rate and in BPP 272, we had to times by the spot rate. Is this because in example 7 we had to buys dollars and in the BPP question we had to sell dollars?
Kind regards
JessYes you are correct
In example 7, the scenario involves being in the UK and paying dollars. The first currency in the spot rate is dollars, so when converting at the spot rate, we have to buy dollars.
Therefore, we divide by the spot rate.
In BPP question 272, the scenario involves being in the US and paying euros. The first currency in the spot rate is dollars, so when converting at the spot rate, we have to sell dollars.
Therefore, we multiply by the spot rate.
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