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Hi John,
I have question on paper JUNE 08, for Q3, the part(a). in this part. I did like this
borrow now for two month: 1.5/(1+0.0375)=1.446Euro
convert at spot (receive Euro, then sell Euro, and buy CHF) 1.446*1.6239=2.3481
invest CHF 2.3481*(1+r)=2.4299. so r=3.48% what’s wrong with my answer?
thanks!Firstly, the business will be receiving Swiss Francs in 2 months time and so it is Swiss Francs that they need to borrow now in order to do a money market hedge (and then convert them to Euros now, and then deposit the Euros for 2 months).
Secondly, intere rates given in the exam (as in real life) are always quoted as yearly rates (even though they are actually applied to shorter periods).
The second point I understood.
However, for your first point. From our lecture notes, money market hedges should borrow or invest foreign currency. Also the question states that company will receive Euro in two month. So I think for parent company they will receive Euro and then sell Euro and buy France. So why should I borrow France now not Euro. It is conflict with notes said. Thanks.No – the question says that they will receive the equivalent of 1.5M euros – not that they will receive euros. They will receive SFr.
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