Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Currency Options- Collars And Currency Swaps
- This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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- July 29, 2016 at 3:33 pm #330146AnonymousInactive
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Hi John,
1) Do we need to know a great deal about currency Option collars? Reason I ask is because Ive seen a question on Straddle option. I know a great deal of the collars in the acca questions is to do with interest rate options never saw any technical question on currency collars beside the above point about straddle which was a theory based question?
2) Currency Swaps is something touched on in the BPP book however I’ve yet to see a past paper question on it. How technical can it be if asked?
July 29, 2016 at 4:41 pm #3301621. Any questions regarding collars will almost certainly be on interest rate collars.
2. Currency swaps have hardly been asked and are really interest rate swaps. The only real difference is that because they are in two different currencies there is the need to convert the interest payments and the repayment of the principal. At what rates this is to be done depends on the agreement – the question will have to give instructions on how they have agreed to convert.
July 29, 2016 at 5:13 pm #330167AnonymousInactive- Topics: 43
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Thank You John.
Regarding the currency swaps I dont really understand what you mean by converting the interest and repayment of principal.
Say Company A(UK) wants to invest in the US so will need to take out a US dollar loan and company B(US) wants to invest in UK and will need to take out a GBP loan.
A swap will occur where Company A take out GBP and provide the money to company B and then when company B invests in the UK the receipts from the investment will be in GBP which it will transfer to company A for payment on the GBP loan.
Company B will take out a USD loan transfer to Company A who will invest in the US and the receipts from the investment will be in USD which it will transfer to Company B for payments on the USD loan.
Isn’t this how it would work? when will converting be required?
July 30, 2016 at 8:06 am #330231It can work like that in its simplest form.
The only calculation question that I remember was an old one (set by the examiner two examiners ago) where although they did take out loans in their own currency and then pay each others interest, they also agreed to transfer the principles back at the end of the agreement at a fixed exchange rate.
I will try and find the question (none of the revision kits seem to both including it any more) but I would not worry too much about it with regard to calculations – the question made it very clear what was happening, and if the current examiner does ever decide to do something similar then he would also have to make it clear what the agreement was. - AuthorPosts
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