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Struggling with Foreign currency risk pls help

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Struggling with Foreign currency risk pls help

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • December 2, 2014 at 4:04 pm #216087
    alua
    Participant
    • Topics: 28
    • Replies: 37
    • ☆☆

    Q1 Current spot rate for the Dollar/Euro = $/€ 2.000 +/- 0.003. Dollar quoted at 0.2c premium for forward rate. What will a $2,000 receipt be translated to at the forward rate? Answer: €999.50

    Q2 A US co. owes a European co. €3.5m due in 3months. Spot rate $1.96-$2:€1 Annual int rates: US 8% borrowing, 3% Deposit.
    Europe 5% borrowing, 1% Deposit

    What will be equivalent US $ value of payment using money market hedge? Answer: $7,122,195

    Q3 Current spot rate for the $ to the € is $2:€1. Annual int rates are 8% in US and 4% in Europe.
    What is the 3 months forward rate likely to be?
    Answer: $2.0198:€1

    Thank you!

    December 3, 2014 at 7:42 am #216646
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54676
    • ☆☆☆☆☆

    Question1:

    The spot rate is 1.997 – 2.003
    The forward rate therefore is 1.995 – 2.001

    If we convert the receive of $2000 at the forward rate we get 2000/2.001 = 999.50

    December 3, 2014 at 7:47 am #216647
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54676
    • ☆☆☆☆☆

    Question2:

    To answer this would mean me typing out the whole lecture on money market hedging. You will have to watch the free lecture on this.

    December 3, 2014 at 7:49 am #216650
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54676
    • ☆☆☆☆☆

    Question 3:

    We need to use the interest rate parity formula from the formula sheet.

    The US 3 month interest is 8 x 3/12 = 2%
    The Europe 3 month interest rate is 4 x 3/12 = 1%

    So the forward rate is 2 x 1.02/1.01 = 2.0198

  • Author
    Posts
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