Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › MJY(SFM 12/05)
 This topic has 13 replies, 4 voices, and was last updated 5 years ago by John Moffat.

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October 8, 2016 at 5:51 pm #342741alpha2006
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Sir I would like you to help me… why the $ is considered as the payment and the Euro as the receipt.
October 9, 2016 at 2:18 am #342774John MoffatKeymaster Topics: 57
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I am away on vacation at the moment and I do not have my Revision Kits with me (and this exam is no longer available on the ACCA website).
I get home on Wednesday and so if you ask again then, I will answer you immediately 🙂
October 12, 2016 at 6:56 pm #343083alpha2006 Topics: 19
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Hello John I would like to remind you about the question I asked u last time…
October 13, 2016 at 7:12 am #343120John MoffatKeymaster Topics: 57
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I am back home now – thanks for waiting 🙂
I think that maybe you are misreading the table in the question.
It says that for receipts you read across, so for receipts – MJY is receiving $90 and $50, Subsidiary 1 is receiving $40 and $20, and Subsidiary 2 is receiving $30.Similarly, for payments we read down, so for payments, – MJY is paying $170 and $120,and subsidiary 2 is paying $50
So the total receipts are 90 + 50 + 40 + 20 + 30 = 230, and the total payments are 170 + 120 + 50 = 340
Therefore net payment by the group of $110.
(One of the payments/receipts is within the group ($50 from Subsidiary 2 to MJY) and so you could ignore this one completely from both payments and receipts (because we are only really interested in the net amount from/to outside the group), but you would end up with exactly the same net result).
October 13, 2016 at 2:12 pm #343192alpha2006 Topics: 19
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John am so glad about your timely assistance…it really cleared my doubt.
Troder(SFM,6/03)
I really dont understand how the rearrange the call strike price and how they came up with the put strike price… anyway how they make the calculations real confuse me…
Thanks once again for timely assistance…
October 14, 2016 at 8:04 am #343251John MoffatKeymaster Topics: 57
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In future, please start a new thread when it is a question on a new topic – it is so that everyone can benefit from the answers.
I don’t know what you mean by ‘rearranging’ the call strike price. The effective interest rate when using futures (and interest rate options are options on futures) is always 100 – the futures price.
You really need to watch my free lectures on interest rate futures and options. Also, with regard to creating a collar there are various combinations of put and call that can be chosen – I have uploaded a short article on how collars work.https://opentuition.com/articles/p4/interestratecollars/
October 14, 2016 at 6:33 pm #343300alpha2006 Topics: 19
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well noted… but i when through the article, but still i could not know how they arrived at the net receipt and the minimum return,plus the 4.05%.Any time i look at this question it confused me … your lectures really motivated me to choose p4…
October 15, 2016 at 7:55 am #343324John MoffatKeymaster Topics: 57
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Because they are depositing money, they will buy a call option in order to provide a floor – a minimum interest rate.
If the choose to buy a call at a strike price of 95.75, then this will limit the minimum LIBOR interest receipt to 4.25%. However, the question says that they can invest at LIBOR – 35 basis points, so the minimum interest the company would receive is 4.25 – 0.25 = 4%.
But, the have to pay a premium for the option of 0.165%, which reduces the effective minimum interest to 4 – 0.165 = 3.835%.If they are prepared to accept a limit on the maximum interest – a cap – and therefore create a collar, then they will also sell a put option and receive the premium. If they choose to sell a put option at a strike price of 95.50 then they will receive a premium of 0.170 which ends up giving them minimum interest of 3.835 + 0.17 = 4.005%
November 26, 2016 at 4:31 pm #351695usama sohail Topics: 4
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can u explain how they calculated € hedge amount in part b of MJY question??
thanks in advanceNovember 27, 2016 at 5:35 am #351756John MoffatKeymaster Topics: 57
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You need to total up the receipts and payments between MJY and subsidiaries, and the four third party companies.
MJY receives 75 from Co 3.
Sub 1 receives 85 from Co 2
Sub 2 receives 52 from Co 3
So total receipts of 212Sub 1 pays 50 to Co 3.
Sub 2 paus 65 to Co 4
So total payments of 115So net receipt = 212 – 115 = 97
November 27, 2016 at 6:00 am #351768usama sohail Topics: 4
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thankyou so much sir…it was explained in a very complex way in my kit but u solved my problem
Thanx alotNovember 27, 2016 at 6:10 am #351776John MoffatKeymaster Topics: 57
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You are welcome 🙂
November 11, 2017 at 1:43 pm #415257jawadurrahman Topics: 23
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In this question Spot rate is not given through which we can compare exercise price and then decide for whether we exercise option or not? as in your lectures and notes in example 3 spot rates were given so then we exercised option and calculated the “Claim”
Please tell what we will do as in kit their is 700 and 1400, I know how they calculated it but i am not clear about the logic behind it..Thanks
November 12, 2017 at 10:23 am #415365John MoffatKeymaster Topics: 57
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If the option is exercised, then the contract amount is effectively converted at the exercise price. In addition, as always, there is the premium that is payable immediately the options are purchased.
Because of the fixed size contracts, we know from the very start the balance of the transaction that will not be hedged by the options. If we want to protect against the risk on this amount then we can use a forward contract on it immediately using the forward rate that is quoted as of today.

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