- This topic has 1 reply, 2 voices, and was last updated 10 years ago by
.
- Posts
I have reviewed answers from past papers and I’m not pretty sure why when we are comparing forward rate method with money market for hedging the exposure for FX risk at forward rate we just apply the exchange rate without borrowing money/ making a deposit. Could you please add more details how to deal with such type of exam topics? thank you in advance.
A forward rate is a rate agreed for converting a fixed amount on a future date – it is as simple as that.
It is not possible to write up the whole explanation of forward rate and money markets here. What you really need to do is watch my free lecture on this – I go through how and why we do both approaches.
When it is asked in the exam you can be asked to show either or both of the approaches (forward rates and money markets) – usually both – and to advise which is better (which will be the one giving us the greater receipt or the lowest payment).
- You must be logged in to reply to this topic.