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Foreign exchange risk

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Foreign exchange risk

  • This topic has 4 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
  • Author
    Posts
  • March 10, 2016 at 10:43 am #305182
    dumonde
    Participant
    • Topics: 28
    • Replies: 58
    • ☆☆

    John,

    Forgive me for this rather late question, and I can’t quite believe I’ve not noticed this until now but why do we divide the interest rates in the question into quarterly rates if they are already provided at 3 month equivalent rates.

    For example:-

    P is due to receive $5m in 3 months time

    Spot $/£ 1.5384 – 1.5426

    Current 3 month interest rates are:-

    US Prime 5.2% – 5.8%
    UK LIBOR 3.6% – 3.9%

    An obvious oversight on my part, not thinking that straight just now.

    Thanks

    March 10, 2016 at 10:53 am #305188
    dumonde
    Participant
    • Topics: 28
    • Replies: 58
    • ☆☆

    Sorry, I meant to add….

    I assume interest rates will always be quoted as annual rates hence the division into 3m, 6m etc, I just wanted to be sure.

    If they were not quoted as annual rates how would the examiner quote them?

    Thanks

    March 10, 2016 at 11:15 am #305202
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    They are always quoted as annual rates. (It is just that the annual rate the banks quote will differ depending how long the deposit/borrowing is for).

    So if the US rate is 5.2% for 3 month deposits, it means that if you deposit for 3 months the rate is 5.2% per annum, and so the actual interest you will get for the 3 months is 3/12 x 5.2%.

    (For 6 month deposits the bank might quote (say) 5.4% per annum, and so if you were depositing for 6 months the actual interest would be 6/12 x 5.4% )

    March 10, 2016 at 11:20 am #305209
    dumonde
    Participant
    • Topics: 28
    • Replies: 58
    • ☆☆

    Thanks John, I feel I confident about this section of the exam now.

    March 10, 2016 at 12:01 pm #305232
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Great 🙂

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    Posts
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