- This topic has 79 replies, 40 voices, and was last updated 8 years ago by
.
- Posts
Hi there, Danielle and Ahmed Bashir are right; it is supposed to be a PUT option as it is a situation of hedging against the depreciation in the Euro currency in exchange for the US Dollar.
And therefore, should the Euro currency was to move against the company, it is able to ensure the minimum receipt in the US Dollar currency.
Yup, your friends are likely correct in saying that it should be the June contract but nevertheless, you could have done well in other questions perhaps enough to walk you through to a passing mark level.
Just keep your fingers crossed just like myself as I did a blunder too for cancelling out here and there and making it relatively difficult for the examiner to marking my answer script.
All I can say now is Good Luck to the people like who could have done better just to ensure we are able to secure that very important passing mark.
Yes, George, your right! It is about hedging against the depreciation in the Euro exchange rate against the US$ Dollar currency and therefore to hedge using the ‘PUT’ option – the right to sell at the predetermined fixed rate only if the exchange was to moved adversely – the option is to be exercised.
Good Luck!
There is something wrong there, Q1 receipt was around USD 23m, and the historical growth rate was 16.6 % without project. (Dividend grew from 10800 to around 20000). It was way higher than the project which had only 7%.
Hi Danny,
You are receiving EUR 20m and hence you need to hedge against the strengthening of the USD. If the USD depreciates, you will receive much more EUR. If the dollar gets stronger, you will receive less. Thus, your only option is to buy a call, as you want to receive a guaranteed minimum amount.
- Topics: 0
- Replies: 3
- ☆
Guys this a technical error.contract currency is $.expecting to receive Euro.Hence sell Euro ,buy $.since you buy contract currency and home is USA therefore it is buy june call options at strike price.
Exactly, at the end you get like USD 23m out of the EUR 20. And no need for a put as the more the USD depreciates, the more USD you will get from the EUR 20. The examples in BPP were always with contracts based on either GBP or EUR. That’s why it was confusing to see 0.89 as strike, but it makes sense as the contracts were based in USD.
Well guys, my special to thanks to you as I am enlighten with the fact that I did badly as I was not aware about my gravely wrong interpretation especially in the area involving foreign exchange hedging.
I guess I have to start continuing practicing any questions that I can get hold on for this paper P4. I believe I will need to resit it as I did not only get this question so wrong but other
questions as well.Thank you guys for sharing your thoughts particularly, Hans, for bringing up the matter in relation to hedging against foreign currency exchange.
Hi Hans,
Thank you for giving your share of thoughts and opinion.
It has helped me to understand that I have gotten the question wrongly thus not providing the right answer.
This least I know now – I best not waste time preparing for other papers as I will have to resit this paper P4.
Thank you once again and Good Luck to you when the result is out on 18th April, 2016.
In hedging in forward rate i divided 20m with higher forward rate and in future i multiplied locking rate with 20m..and in option chose the call option of june..in qs 1 last part i written than the shareholders will have cocern because the amount that will be rec from sale of inv is uncertain so some debt and equity should also be raised for financing.. in div capacity just calculated the amount like rough work.. anyone plz give ur comments regarding what ive done in qs 1..and will i get professional marks if used the report format in dicussiob paper?
If we were to receive euro 20m we would hedge that amount so that if euro depreciate or dollar appreciates we would have to face loss, that’s why we chose sell future and lock a rate so that uncertainty is beg dealt with and we would sell those euros at locked rate and also we would know today what proceeds in dollar we’ll get!
So for future => Sell Euro Future
Nd for options => Put OptionHi Noor,
My apology as the last time I thought it was a put option, but it is a call option.
Congratulations, you are likely right. So keep your fingers crossed.
Good Luck.
Hi Basher,
Now, I know that I have just so little knowledge and understanding about hedging against foreign currency exposure.
I need to do some homework now perhaps of what you have written thus far.
Thank you so much and Good Luck!
- Topics: 0
- Replies: 6
- ☆
prepared to sit on 2nd attempt 🙁
- Topics: 0
- Replies: 1
- ☆
Pe=15m this will be paid in 3years time hence if NPV=0 then Pa the present value of the cash flows will = present value of 15m X discount factor for 3 yrs.
Hi danychew….i did dat right but my paper was jus satisfactory…awl the very best to u too!
When contract size is in local currency always buy call for receipt.. its a rule.. secondly aaron npv is already diacounted.. why discounting it again?? Pa is 15
Noorr can u plz briefly describe what u written in last part of qs 1? Where issues of financing were to be mentioned? And can change in interst effect on apprisal in qs 4 b can be described by refring to intrest power parity?
The issues were i gues they needed internally generated funds as debt n equity was expensive relatively ….due to asymtry info….they were afraid of euros being depreciated resulting in volatile cfz……usin internal funds wil reduce the div capacity etc…..! Relatin to q4 yes it can b described dat way! N above i was outa time n cudnt attempt q1 theory part which u r talkin abt….attempted 80 perc only! Jus prayin to pass! Goodluck …!
Dear the last part stated that company wanted to finance project from the receipt from the sale of investment so write the issues relating to sale mode of financing ihd written that co is facing the fluctuations of exchange rate so depending on the receipt to finance the project is risky because of the uncertainity of the amount to be received..so co should also raise funds from some other source..dear the tension is that for march attempt there will be no paper available on the site neither the anwers
- The topic ‘*** P4 March 2016 Exam was.. Instant Poll and comments ***’ is closed to new replies.