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Hello sir good morning,
Its a question on currency hedging.
Money market hedge. If you look at the BPP solution to this question it is very confusing to me I knw the theory behind money market hedging like when we pay in foreign currency we invest in foreign deposit and borrow in local currency and vice versa but solution provided does not reconcile with my understanding and slightly putting me off.
Carry on with the same question next is currency futures on two months payment future contract bought is slightly underhedged by 18265 euros but wen it calculates the net position at the transaction date it converts the full amount required and ignores the underhedged amount not covered by the contract.
On three month payments it is again underhedged again by a significant amount but it is not been accounted for in the solution.
Could you please look at the solution and suggest what should I do with it. Thank you sirWith regard to the money market hedging, everything in the answer is correct (and is as I do it in my free lectures). You will have to say which bit of the answer to this you are not clear about.
With regard to the futures, the full amount of the transaction itself is converted at whatever the spot rate turns out to be – so they have done this bit correctly (and they have dealt with the profit/loss on futures correctly as well).
You are correct in that they should also have brought in the under/over hedged amount converted at the forward rate, and they have not done so.I don’t know if you have watched my free lectures on foreign exchange risk management, but if not then they will help you.
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