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money market hedging… help please

Forums › ACCA Forums › ACCA FM Financial Management Forums › money market hedging… help please

  • This topic has 2 replies, 2 voices, and was last updated 14 years ago by yousouf.
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  • October 30, 2010 at 6:02 am #45737
    yousouf
    Member
    • Topics: 7
    • Replies: 17
    • ☆

    in chapter 22 example 6 to get the amount to be borrowed, $5M is divided by 1.0145. we get the 1.0145 by dividing the US borrowing rate by 4 i.e 5.8%/4 and then we add one:

    5.8% divided by 4 = 1.45% ( 0.0145 in terms of decimal)
    we add one: 0.0145 + 1 = 1.0145

    what I want to know is why we divide it by 4??????

    October 30, 2010 at 9:10 pm #69938
    bridmw
    Member
    • Topics: 5
    • Replies: 132
    • ☆☆

    Because the 5.8% is the annual borrowing rate but the transaction needs to be hedged for only 3 months = 1/4 of a year.

    October 31, 2010 at 4:52 am #69939
    yousouf
    Member
    • Topics: 7
    • Replies: 17
    • ☆

    @ bridmw thanks a lot…

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