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Hello John,
Could you please explain why the examiner uses the buying rate of the six months forward of 2.5462 and not the selling rate of 2.6121to hedge the 10,000,000 EUR that Okan Co will receive in 6 months? I thought Okan would SELL Euros to buy Y$?
Thanks for your help!
They are indeed receiving Euros and will therefore be selling Euros to buy Yen.
2.5462 is the exchange rate for buying Yen. (If you used 2.6121 then they would end up with more Yen, and that cannot possibly be the case – it is the bank that gains from the spread and not us 🙂 )
(Yen is the first quoted currency (i.e. it is Yen to 1 Euro) and therefore the first rate is the rate for buying Yen and the second is the rate for selling Yen)
Oh, that’s right. It’s the buying and selling YEN rate. I guess it was late… 🙂
Thanks a lot, John!
Best regards,
Margarita
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