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Good day tutor,
The above 2 questions performed netting in a different way.
Multidrop converts all currency flows into Euros before netting them out. Currency flows between the group’s subsidiaries are not netted off to 0.
MJY on the other hand nets the specific currency flow out before converting to pounds. Payment/receipts between subsidiaries are netted off to a balance of 0.
Could you kindly explain why?
I tried performing the MJY method on multi drop question and got a different answer. For instance, using MJY method I got a net USD payment of 5.4m (-6.4m+6.4m+5.4m+5m-5m). $6.4m and 5m are payments between the group subsidiaries.
The answer for the multi drop question is euro 4.06m.
I am sorry, but I am away from home until Wednesday and I do not have access to the questions. Please ask again on Wednesday and then I will be able to answer you.
No worries at all, I really do appreciate that you took the time to reply even when its New Years and when you should be resting! Hope you had a great 2017 and a fantastic 2018 ahead.
Looking forward to your reply 🙂I am sorry – I know I promised today but I have been delayed abroad for a day due to problems 🙁
I do apologise – I did get home last Thursday, but forgot that your question was pending.
The two questions are asking for completely different things.
In Multidrop, the question says that all the companies have agreed to convert everything to euros and then just settle up the net euro amounts. So there is no hedging needed.
In MJY this is not the case. All the monies owing and owed remain in their original currencies and are then hedged using forward rates. Rather than each of the group companies use forward rates on their individual balances, you are required to look at the net amounts owing/owed to/from the group as a whole, and then use forward rates on these net balances.
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