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Kenduri Q#48 bpp .. currency options

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Kenduri Q#48 bpp .. currency options

  • This topic has 7 replies, 3 voices, and was last updated 4 years ago by John Moffat.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • June 2, 2016 at 11:26 am #318845
    mansoor
    Participant
    • Topics: 424
    • Replies: 542
    • ☆☆☆☆

    good Morning Sir!

    a uk co has to pay a us supplier $2.4m.in 3 month’s time.

    one strike price given is 1.62 $/gbp

    in calculation the # of contacts

    we do: 2400000/1.62/62500 = 23.7

    the answer also comes with 23.7 but it is rounding the contracts down to 23 rather than 24.

    any special reason as to why?

    also, at 23 contracts, the full amount of payment is not hedged and it hedges the difference using the forward rate – which i understand

    BUT

    i wd like to know what if any treatment is to be done if the amount hedged is greater than the payment??

    regards

    June 2, 2016 at 12:08 pm #318855
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54675
    • ☆☆☆☆☆

    It does not matter which way you round the number of contracts – you will still get full marks.

    If there is an over or under hedge then you could use the forward rate to either sell the excess currency or else to buy the excess currency.

    June 2, 2016 at 4:26 pm #318901
    mansoor
    Participant
    • Topics: 424
    • Replies: 542
    • ☆☆☆☆

    thank u

    June 2, 2016 at 6:21 pm #318930
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54675
    • ☆☆☆☆☆

    You are welcome 🙂

    September 9, 2020 at 11:30 am #584344
    losercase
    Member
    • Topics: 20
    • Replies: 37
    • ☆☆

    If 24 was the number of contract how would the calculation for hedging would have changed ?
    Thank you. 🙂

    September 9, 2020 at 1:34 pm #584379
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54675
    • ☆☆☆☆☆

    You should not need me to repeat the whole of the arithmetic. It would be the same approach as before with the difference that there would be an over-hedge instead of an under-hedge. Again the forward rate would be used but 1.6037 instead of 1.5996 because they would be selling USD rather than buying them.

    Have you watched my free lectures on the management of foreign exchange risk?

    September 9, 2020 at 2:48 pm #584397
    losercase
    Member
    • Topics: 20
    • Replies: 37
    • ☆☆

    Yes I have watched it but things are quite confusing at last moment

    So it would be
    Unhedged amount = (1,500,000X1.62) -2,400,0000 = 30000
    Hedged using forward market – 30000/1.6037 = 18707
    Premium – 24×62500×0.0342 =51300/1.5938 =32187

    Total payment would be – 1500000 -18707+32187 = 1513480

    Is it correct ?

    September 9, 2020 at 6:15 pm #584481
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54675
    • ☆☆☆☆☆

    Yes, that is correct 🙂

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