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Hi there,
my question is when we hedge a receipt , in the third step we multiply the converted £s with the interest rate n the an amount excessive to our requirement , is that right?
if so then why don’t we deposit an amount which after maturing (gross of interest) equals to the converted £s that we require , i.e by dividing the £s with the interest rate ??
kindly help me as the exams are near please !!
thank you !If we are receiving in another currency, then we do not have a requirement of a certain number of pounds.
Suppose we are receiving $’s on a future date.To be able to convert $’s to £’s now (at todays spot) we need to borrow $’s now. We borrow as many dollars as we will be able to pay back when we get the $ receipt (which means we borrow a few less $’s because by the time we repay there will be interest added to the borrowing).
Having decided how many $’s we can afford to borrow now, we then convert them to £’s and put those £’s on deposit so as to earn interest.
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