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Lammer PLC (June 06) Money market hedge

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Lammer PLC (June 06) Money market hedge

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • July 19, 2021 at 4:26 pm #628801
    yolandabeck
    Member
    • Topics: 1
    • Replies: 0
    • ☆

    In the answer to this exercise we get:

    Borrow£595,373at5.5%perannumforfivemonths,

    I’m not sure how they arrived at 595,373 with the exchange rates available.

    Please can you help?

    Many thanks,

    July 20, 2021 at 7:54 am #628876
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51550
    • ☆☆☆☆☆

    They need to pay $1,150,000 in 5 months time.
    The $ interest is 2% per annum and so for 5 months it will be 5/12 x 2% = 0.83333% interest.

    So the $’s to deposit now in order to have $1,150,000 in 5 months time are 1,150,000/1.0083333 = $1,140,496.

    The will buy that many $’s now at the spot exchange rate of 1.9156, which means that the £’s they need to borrow now are 1,140,496 / 1.9156 = £595,373

    Do watch my free lectures on foreign exchange risk management where I explain money market hedging in detail.

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