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Sir,
this is my first question and please be patient with me..i have watched this money market hedge lecture twice and if you end up suggesting me watch it again that its my poor understanding.poor me!!!
but i have this issue.
I followed the example 7. which is due to pay $8 in 3 months.
the procedure for making payment is as you said..
borrow home currency for 3 months
convert to fx now ( divide)
deposit fx for 3 moths.
and u said to work on back wards
and to convert to fx (2nd step) you said to divide it buy rate..you example was ok and well explained..but i am confused of looking BPP answer to the following question as they have multiplied the conversion step…
BPP kit Q 271.
A us company owes European company Euro 3.5million due to be paid in 3 months time. the spot exchange rate is $1.96-$2: Eur 1 currently. Annual interest rate are
borrowing deposit
usd 8% 3%
euro 5% 1%what will be the equivalent us $ value of the payment using a money market hedge?
1-$6965432
2-$6979750
3-$7485149
4-$7122195i have followed you steps and could not got the answer.and checked the bpp answer and i found that second step is different. they have multiplied instead of dividing..
please explain why the second step got different to your explanation and bpp with this payment scenario.
Thank you in advance..
It is because of the way that the exchange rate has been given.
Here the exchange rate is given as the number of $’s equal to 1 euro.
Therefore when converting from euros to dollars we need to multiply by the exchange rate in order to get the number of $’s.
(For example, if 1 euro is equal to $2, then 5 euros is equal to 5 x 2 = $10)
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