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over hedge

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › over hedge

  • This topic has 2 replies, 2 voices, and was last updated 10 years ago by John Moffat.
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  • November 17, 2014 at 6:16 am #210593
    student07
    Member
    • Topics: 193
    • Replies: 162
    • ☆☆☆

    Sir if the no of contract comes to suppose .98 and we round it to one then it is called over hedge am i correct and if it come suppose 22.22 and we do it 22 then its called under hedge is it correct.Can there b under hedge as in most question there is only over hedge market. Thanks

    November 17, 2014 at 7:06 am #210597
    student07
    Member
    • Topics: 193
    • Replies: 162
    • ☆☆☆

    Sir in question kyt 6/99 no of contract are 11.2 and it is rounded to 11 does that mean its under hedge, then why there is ni adjustment for that and in part (a)i of this question for finding tick size from where did 0.000001 came.And in part a(iii) for finding hedge effeciency what is this 74197 can u pls tell me the formula. Many thanks Sir.

    November 17, 2014 at 9:57 am #210645
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54722
    • ☆☆☆☆☆

    I don’t know what you mean by there only being an over hedge market.

    If because of contract size we are unable to hedge the exact amount, then we will certainly be either over or under hedging. If we wanted to remove the risk associated with the over or under hedge then we could go for forward rates on that amount (assuming forward rates are available).

    With regard to ticks and hedging efficiency, you should watch the free lectures for full detail – I explain both in the lectures and I cannot type out the whole lecture here !!

    A tick is the smallest movement (which for exchange rates is 0.0001). However you never actually need to use ticks in the exam – I never would.

    With regard to hedging efficiency, it is very unlikely that this would be asked for these days (it is something the examiner before last used to ask sometimes). However it is the end result of the hedge divided by what the result would be if we converted at the current spot, expressed as a percentage.

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