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Hello everyone. I need a little help.
The qs in P4 march/june hybrid paper included a fwd
market hedging technique.
The relevant scenario is as followsIt is expected that Lirio Co($) will receive Euro
(€) 20 million in three months’
exchange rate Three-month forward rates:-
$1·1559–$1·1601 :Per €1The answer calculated in the marking scheme used the rate $1.1559.
My qs is that shouldnt the right hand rate be used to calculate the reciept i.e 1.1601?
The quote is dollars per euro.
So to convert the euros into dollars you need to multiply by the exchange rate.
Since it is a receipt you multiply by the lower rate i.e. $1.1559
(The first few examples in my lectures on foreign exchange risk management go through using exchange rates all different ways round 🙂 )
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