Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Money Market Hedge – June 2013
- This topic has 7 replies, 3 voices, and was last updated 10 years ago by John Moffat.
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- November 28, 2013 at 12:30 pm #148277
Dear Sir,
I’ve been working June 2013 and I’m struggle to move on from Q3 last part.
Here is the question:
Short term dollar borrowing rate 5% per year
Short term dollar deposit rate 4% per yearTGA Co expect to receive Euro500,000 from export sales at the end of 3 months. A forward rate of euro1.687 per $1 has been offered by the company’s bank and the sport rate is euro1.675 per $1. TGA Co can borrow short term in the euro at 9% per year.
Calculate the dollar income from a FMH and a MMH, and indicate which hedge would be financially prefered by TGA Co.I’m able to work out the FMH but stuggle with MMH:
FMH:Euro/$ = 1.687
500,000/$=1.687
=$296,384 under FMHPlease help for working under MMH. I have the steps under MMH but can’t go with it…and very confusing with borrowing and deposit rate.
Thank you in advance.
November 28, 2013 at 1:49 pm #148290AnonymousInactive- Topics: 0
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dr…since its a receipt: steps as follows..1.discounting FCY with B.R 2. Sell @spot rate 3. Compounding of LCY @ D.R
therefore 1. euro500,000* {1+(9%*[3/12])}to the power of negative one= euro 488998
2. $1= 1.675euro…488988euro/1.675 = $291939
3.$291,939 * {1+(4%*[3/12])} =$ 294858.4therefore comparing FMH & MMH..select the least one thats $294 858
and difference between them.
hope u’ll understand..November 28, 2013 at 2:31 pm #148296Thank you very much neha.
I got it for now…but I’m still struggle to understand when to use the borrowing rate and deposit rate.For this case, it’s a foreign receipt. But if it was for a foreign payment…you would have calculate present value by which rate…deposit rate or borrowing rate….
I think I’m gonna to learn by heart, the steps to follow when there is foreign payment or foreign receipt.
Niway, thank you πNovember 28, 2013 at 3:43 pm #148302AnonymousInactive- Topics: 0
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..Its ok… yes steps of payment and receipt should be learnt by heart to be able to do MMH…like i stated for the receipt ones…
and as for payments the steps are as follows…1.discounting of FCY @ D.R 2. BUY @spot rate 3.Compounding of LCY @ B.R..
,,it may helps u if u learnt them like this..!November 28, 2013 at 3:59 pm #148307It is very dangerous just to learn the rules by heart. At least 50% of the exam is likely to be writing – the examiner is trying to test that you understand what you are doing, and why. It is because too many people just learn the rules that the pass rate is so low.
Realise that the whole reason for the borrowing/depositing is because we want to convert money today at today’s spot. (So that we are not affected by any changes in the spot by the time of the actual transaction).
If we are receiving money on a future date, then the only way we can convert money now is if we borrow now (and pay back the borrowing when we receive the payment from the customer).
If we are paying money on a future date, then if we convert now, we don’t want to pay them early, so we convert now and then put the money on deposit to earn interest and then pay the supplier on the due date.
If you have not yet watched the lectures here on this topic, then it may be worth doing so.
(However, foreign exchange risk is not so likely in December, although obviously I could be wrong π )November 28, 2013 at 4:00 pm #148308nehabuddy:
I realise you are trying to help, but please stop posting answers on this forum. Post on the general forums by all means, but this forum is to ask questions of the tutor – the tutor is not you!
(You posted an answer to a question someone asked about working capital, but your answer was nothing to do with what was being asked!)November 28, 2013 at 5:41 pm #148344Thank you John, I’ve always hate learning by heart. I love to get the logic behind so I can face any situation in the exam.
Indeed, I’ve now got the logic behind borrowing rate and deposit rate. But, technically it’s hard to remember. I’ll kept revising till date of exams.
Thank you very much Sir πNovember 29, 2013 at 8:56 am #148414You are welcome π
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