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Sir i am confused why in this question(MJY) payment in $ and receipt in € while base currency is in £..normally in netting we convert all receipts and payment in base currency which is £ here and then net them off…please explain
We do not normally convert all receipts and payments to base currency – if we did then there would be no exchange risk to hedge against!!
(I think you are thinking of one particular question where the question specifically said that inter-group transactions were to be converted at mid-market spot).For this question we need to treat that group as one big company and calculate the net payment or receipt for $’s and for Euros that are outside of the group.
Once this has been done, we can look at the ways of hedging the risk for the net payment/receipt in each of the two currencies.
The calculations are all shown in the examiners answer.
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