FMDec07 Q4 PKA Co Rate Hedging

first, u need to remeber that bank will never make loss. then think about what risk you are facing? for example, if you have foreign payment , you will face pay more in in your home currency. which means you need to use your own currency to buy foreign currency from the bank to pay the foreign payable. if u buy form bank, the bank will want more of your home currency. then u can find out u should use adding or minus.

for example: you need pay $450,000 in 3 month time, the 3 month forward rate is 1,988+/- 0.002

you need to use $450,000 divided the small exchage rate, as u are going to give bank home currency to exchange for dollar, and bank will want more of your home currency.
and it's same for money market, if u use samll in forward, you are going to use small rate in money market.

if u r going to receive $450,000 in 3 month time, now you are going to sell the [/b]$450,000 to bank, and bank will want to give you small amount of home currency.
if you wang to calculate the home currency, you need to use dollar divide the exchange rate as well. but you need a large exchange rate now, cause bank want to give small amount of homecurrency.

first, u need to remeber that bank will never make loss. then think about what risk you are facing? for example, if you have foreign payment , you will face pay more in in your home currency. which means you need to use your own currency to buy foreign currency from the bank to pay the foreign payable. if u buy form bank, the bank will want more of your home currency. then u can find out u should use adding or minus.

for example: you need pay $450,000 in 3 month time, the 3 month forward rate is 1,988+/- 0.002

you need to use $450,000 divided the small exchage rate, as u are going to give bank home currency to exchange for dollar, and bank will want more of your home currency.
and it's same for money market, if u use samll in forward, you are going to use small rate in money market.

if u r going to receive $450,000 in 3 month time, now you are going to sell the [/b]$450,000 to bank, and bank will want to give you small amount of home currency.
if you wang to calculate the home currency, you need to use dollar divide the exchange rate as well. but you need a large exchange rate now, cause bank want to give small amount of homecurrency.

Hi
I know this can be very confusing, it took me a while until I understood. This is my approach, if you buy currency, you buy at high price. You buy currency, when you export, so your clients pay in different currency. In this case you need to buy; in other words, exchange dollars against pounds, but if you are selling, selling pounds so that you can get dollars, the bank will offer you the lowest price. The bank never looses.
To answer your question:
PKA 12/07 : PKA needs to pay to a foreign suppliers $250,000. PKA needs to sell euros(home currency) and get dollars. Therefore the bank will pay its euros at the lowest price, spot rate 1.996 and forward rate 1.975.
Pilot paper:
In this question you need to calculate the expected receipts, so we are selling dollars (received by customers or exports) and getting pounds. The bank will give us the highest rate so that we get less pounds for every dollar.

In conclusion, Buy high +
Sell low -

I really hope this help and if you have any other question, I am happy to help.
Good luck in your exam

Thank you, alancong & carohbs.