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hello sir,
as per the qn we expect the payment in 5 months. when the calculating the forward market hedge, i do not understand as in how did they arrive to the 7/9 and 2/9 months:
** 1.9066x(7/9) + 1.8901x (2/9)=1.9029.
SECONDLY, is there any alternative to arrive at the above answ (1.9029). apart from the answer provided in the exam kit?
please kindly assist me.
when calculating the money market hedge why have they borrowed 595,373pounds @ 5.5%.
because i used the borrowing amt as 1150$ @ 4% and converted it to spot rate and then deposited it @ 4.2%. my final answer is around 600.732pounds.
is my answer correct or not?
First question:
The examiner has calculated it correctly, but in a strange way.
I think more sensible is to apportion between the 3 month rate and the 12 month rate by taking the 3 month rate and adding 2 months worth of the difference between the 3 and 12 month rate (the difference between them being 9 months).So 1.9066 + 2/9 (1.8901 – 1.9066) = 1.9029
Thank you. Indeed this is quite clear. Thank you again. could you help me out with my second question.
If they deposit $1150 at 4.2% then they will end up with more than $1150 – but they only need $1150.
You have to decide how much they need to deposit in order to end up with $1150, then convert, and then borrow the converted amount.
My free lectures on money market hedging will help you.
Hi John,
In lammer plc, when calculating the future contracts I did,
1 June 1Nov
Spot 1.9156 1.8901
Futures 1.8901 1.88585 (bal. Fig
– – – – – – – – – – – – – – – – – –
0.0255 0.00425Unexpired basis =0.0255*(2/12)=0.00425
Futures rate =1.8901 +0.00425=1.89435Payment =$1150/1.89435 =$607
Is this the correct way to do? If not then please tell me whats the correct way?No it is not correct – the examiners answer shows the correct rate.
First you are using the 1 year forward rate, which has nothing to do with futures.
You should be using the December futures price of 1.8986
Secondly, there are 7 months between ‘now’ and the end of the future, so the unexpired basis is 2/7 (not 2/12)
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