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Sir, in this question..the net import is $1150 000 which payable to US. My question is for the money market hedge part…
1. As we need to hedge the dollar exposure payment, we need to buy $, so have to borrow pound sterling and convert it at current spot rate. But, as we dont know how much to borrow, we need to work out the calculation from deposit first before arriving the borrowing part right?
2. As the flow of calculation would be from deposit calculation to the borrowing part, when we want to explain the calculation, does we have to explain the calculation backward? (like explain from borrowing part first..)
Please help me..
Yes – you do have to work ‘backwards’.
You really should watch my free lectures on this because I explain what is happening in detail, with examples!
Yeah i already watched your lecture, that’s why i know how to calculate money market hedge and the reason behind it.
I’m just confuse when the answer is explain backward (maybe i missed the part where you mentioned this) and that made me doubt my understanding for sec.
Thank you for helping! 🙂
Btw, for the same question in part (c), how where did the exchange rate in yr1 – 1.8581 came from? bcs i only saw one rate available
The question says that the dollar is expected to strengthen by 3% per year.
Therefore the exchange rate falls by 3% each year and so is 97% of what it was the year before.
97% x 1.9156 = 1.8581
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