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Hello Sir,
Please may you help? In part b) I do not understand the treatment of the Hongkong receipt in the solution. Why couldn’t we enter a forward contract for the receipt vs it being converted to $US? I’m totally lost as to what’s going on there.
Calculating the options was quite tricky as wellBecause the HK currency is pegged against the US$, it means there is a fixed exchange rate between the two currencies.
So rather then try and hedge the HK receipt on its own, it is converted to $’s so that then it can be netter against the $ payment and only the net $ amount needs then to be hedged.Thank you sir for the help i now understand the concept of pegging – that is why i was lost.
If I may ask again, i did not understand taking into account the financing the cost of the premium to compare it with the money market hedge?
The premium is payable immediately, whereas with money market hedging no cash flow occurs until later.
To make them fully comparable then we need to take account of that fact. (Although it is a minor point for the exam)
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