- This topic has 3 replies, 2 voices, and was last updated 3 years ago by
.
- Posts
Dear John,
I am a little confused with the following:
When I am due to receive e.g. 5m USD in 3 months time (like in example 6), I am borrowing the USD first, then translating this amount to GBP by using the second exchange rate of 1.5426 (as I am selling USD / buying GBP in this case??) and then deposit the GBP.
In the example 7 it is the other way around as I am due to PAY 8m USD. So I am depositing USD, then converting it to GBP again (BUT: using the first lower exchange rate of 1.6201) and then borrowing the GBP.
My question is why we are “Buying” the GBP to convert to GBP in example 6 and “Selling” the GBP in the example 7?
I thought I understood it in the past, but now I am confused again.Thank you so much for your help.
Best regards,
MargaritaIn example 6, we are receiving USD in 3 months time. In order to be able to convert USD to GBP now at todays exchange rate we borrow USD now (the later receipt will pay off the borrowing) and convert the USD to GBP now. That means selling USD and buying GBP.
In example 7, although we have to do the arithmetic the way round that you have typed (in order to calculate the amounts), what is actually happening is that we borrow GBP now so that we can convert USD at todays exchange rate. The USD are put on deposit so as to give the money to pay. the USD on the future date. That means that we have to buy USD now which is the same as selling GBP now.
Have you watched the free lectures working through these examples and explaining what is happening?
Dear John,
Thank you so much for your explanation.
Yes, I did watch the free lectures, but was still confused.Thanks again!
Best regards,
Margarita
- The topic ‘Money Market Hedging – Selling or Buying rate’ is closed to new replies.