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March/June 2021 Sample Answers Qn3

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › March/June 2021 Sample Answers Qn3

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • August 10, 2021 at 6:43 am #630965
    checkling
    Member
    • Topics: 1
    • Replies: 1
    • ☆

    Hi Sir,

    1. For the future contract will it be correct if the calculation for under-hedge be ok?

    For the question the Number of contracts = MR96,461,668/MR500,000 = 192·9, say 193
    For general approach do we always over hedge when is decimal point is more than 0.5?

    2. For the calculation on the forward contract.

    Exchange rates (quoted as US dollar per Malaysian Ringgit US$/MR1)
    Spot 0·2355 – 0·2358
    Four months forward 0·2370 – 0·2374

    why use 0.2374 and not 0.2370?

    Thanks in advance for your reply.

    Regards,
    Check Ling

    August 10, 2021 at 8:17 am #630987
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51575
    • ☆☆☆☆☆

    1. Do not simply learn a rule (because it depends on whether they are receiving or paying the other currency) but think through the logic.
    The are hedging a net receipt of $22.9M which would need 192.9 contracts. By using 193 contracts they are hedging a receipt bigger than $22.9M and therefore they are hedging more than they will actually be receiving – so they have over hedged.

    2. Because the futures will convert more $’s than they actually are going to receive, then will need to buy the extra $’s and the forward rate for buying $’s is 0.2370 (and the answer has used 0.2370 for this part).

    (The 0.2374 that has been used for the futures themselves is the lock-in rate. It is only by coincidence that this happens to be the same as one of the forward rates.)

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