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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Dec 2018 section B Nutourne
The 50,000 to be hedged on the rest of the FRA – it’s a receipt, so I thought that the bank would buy High but they have used the lower rate 1.0358 to multiply by the 50,000. Why is this ?
The reason for there being a spread is so that the banks can make a profit. Therefore the rate used is always whichever rate is worse for the company.
Using the higher rate would give a bigger receipt which could not possibly be the case 🙂
I do suggest that you watch my free lectures on foreign exchange risk management. I spend time at the beginning of the first of the lectures explaining which rate to use and why.
Thanks John, I will rewatch the lecture.
You are welcome, and do ask again if the lecture does not make it clear for you 🙂