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polytot 06/04

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › polytot 06/04

  • This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • May 24, 2016 at 2:06 am #316716
    Anonymous
    Inactive
    • Topics: 43
    • Replies: 65
    • ☆☆

    Hi John

    Why are the over-hedged amounts being converted at the bank sell rate of 1.5337 and not the bank buy rate of 1.5374.

    The way i understand it is that we are over hedged so we are hedging for more then we will receive for the dollars coming into the business, so wouldn’t we have to sell back the over hedged dollars to the bank and hence use the bank buy rate? think i might be confused about what the over hedged amount really is.

    May 24, 2016 at 7:47 am #316754
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54709
    • ☆☆☆☆☆

    If we were buying $’s then an over-hedge would mean we were buying too many and therefore we would have to sell the over-hedge (and therefore use the higher rate).

    However here we are selling $’s and so the over-hedge means that we are selling too many (more than we actually receive from the customer) and therefore we need to buy the extra $’s and therefore use the lower rate.

    (Don’t worry too much about over or under hedging – simply mentioning it and stating that they could use forward rates to deal with the risk on it is sufficient in the exam.)

    May 24, 2016 at 5:36 pm #316870
    Anonymous
    Inactive
    • Topics: 43
    • Replies: 65
    • ☆☆

    Thank you very much- its the little things that get to me haha, thanks allot makes so much sense.

    May 24, 2016 at 6:14 pm #316876
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54709
    • ☆☆☆☆☆

    You are welcome 🙂

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