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Dear sir, can you please tell us in this question when we are hedging the amount over-hedge why are we using forward rate 0.2370 and it is written in answer, Amount over-hedged = (500,000 x 193 x $0·2374) – $22,900,000 = $9,100
Payment at forward rate = $9,100/0·2370 = MR38,397
while this is a question of receipts.can you please tell me for the receipt case why are we using 0.2370 not 0.2374?
Because they have over-hedged it means that they are using futures on 9,100 more $’s then they will actually receive. Therefore they need to buy the extra $’s on the forward market in order to complete the hedge – hence the payment and the forward rate being used.
(Although I found the question, in future I will be grateful if you can also give the date of the relevant exam because I can’t remember the name of every question in every exam 🙂 🙂 )
Thank you so much sir.
Sir can you please guide me little more that if two forward rates given in a payment question and results in under-hedge so whether we have to convert that amount at higher forward rate to close the hedge???If as a result we need to sell the foreign currency that we use the higher rate. If we need to buy more of the foreign currency then we use the lower rate.
It is the same rule when choosing the rate as the rule for normal conversion at the spot rate.
Have you watched my free lectures on foreign exchange risk management, because in the first of the lectures I do explain how to decide what exchange rate to use?
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