• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

Congratulations to Jamil from Pakistan and Jeeva from Malaysia - Global Prize winners!
see all ACCA December 2022 Genius Hunt Competition winners >>

Specially for OpenTuition students: 20% off BPP Books for ACCA & CIMA exams – Get your BPP Discount Code >>

Money Market Hedge

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Money Market Hedge

  • This topic has 5 replies, 2 voices, and was last updated 8 months ago by Anonymous.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • June 1, 2022 at 8:12 am #657046
    Anonymous
    Inactive
    • Topics: 29
    • Replies: 39
    • ☆☆

    Hi Sir, in Example 6 of the lecture notes for chapter 23, why do we take times 3/12 when finding the 3-months interest rate rather than using the formula (1+Y)=(1+M) ?

    June 1, 2022 at 9:45 am #657053
    Anonymous
    Inactive
    • Topics: 29
    • Replies: 39
    • ☆☆

    A question to illustrate what I mean.
    Bunga Co expects to receive E750000 from a customer in Europe in 6 months time. The spot rate is E/$ 2.330-2.349. The following interest rates are available :
    Euros 4%-8% per year
    Dollar 2%-3.5% per year

    Using interest rate parity(based on borrowing rate) what should be the 6 months forward rate?

    The answer I got from using (1+Y)=(1+M) was almost similar but not the same and therefore would’ve been marked wrong under the system whose answer used simple interest and therefore just took 8%*1/2 to get the 6 months interest.

    June 1, 2022 at 3:49 pm #657083
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    There is no such formula as (1+Y) = (1+M). It would be meaningless because it would mean that Y = M !!

    For money market hedging the monthly interest rate used is 1/12 x the yearly interest rate. In my example it is 3 months and is therefore 3/12 of the yearly rate. In your example it is 6 months and is therefore 6/12 x the yearly rate.

    I don’t know where you found the question Bunga, but there has been no past exam question with that name and neither in there a question with that name in the BPP Revision Kit.

    June 1, 2022 at 6:42 pm #657094
    Anonymous
    Inactive
    • Topics: 29
    • Replies: 39
    • ☆☆

    The formula that we use in early settlement discount to count the yearly rate, couldn’t we use that to calculate the 6 monthly interest rate? Therefore it would be (1+8%)^(1/2) -1= 6 monthly rate. The answer for this question was 2.401 whereas if I used that formula it would be 2.399.

    June 2, 2022 at 8:41 am #657113
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51576
    • ☆☆☆☆☆

    I know that is the formula you mean, but that was not what your typed!!

    However I have answered your question. For money market hedging the monthly rate is 1/12 of the annual rate.

    June 2, 2022 at 9:36 am #657121
    Anonymous
    Inactive
    • Topics: 29
    • Replies: 39
    • ☆☆

    Yes I understand that is how we calculate the monthly rate. But it begs the question of why as if we were trying to forecast a 2 year forward rate using the IR Parity formula we would compound it by 2 but when we’re trying to forecast a 6-monthly rate we assume that it doesn’t compound?(I’m assuming that the (1+8%)^(6/12)-1 is to find a compound monthly rate)

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

ACCA News:

 

ACCA My Exam Performance for non-variant Applied Skills exams is available NOW

NEW! Download the ACCA Pass Guide

FREE Verifiable CPD for ACCA Members

ACCA mock exams and debrief videos

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

Donate

If you have benefited from OpenTuition please donate.

ACCA CBE 2023 Exams

Instant Poll * How was your exam, and what was the result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Specially for OpenTuition students

20% off BPP Books

Get BPP Discount Code

Latest comments

  • Iby2012 on Introduction to Financial Accounting – ACCA Financial Accounting (FA) lectures
  • Iby2012 on Introduction to Financial Accounting – ACCA Financial Accounting (FA) lectures
  • Iby2012 on Introduction to Financial Accounting – ACCA Financial Accounting (FA) lectures
  • baraka42 on PM Chapter 13 Questions Standard Costing and Basic Variance Analysis
  • baraka42 on PM Chapter 13 Questions Standard Costing and Basic Variance Analysis

Copyright © 2023 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in


We use cookies to show you relevant advertising, find out more: Privacy Policy · Cookie Policy