The document provides example of receivable and payable hedge through forward contracts. The document is super easy to understand and you will be able to get a hold of forward contract hedging in no time.
Which currency to buy and which to sell? Which currency to buy and which to sell?
- UK Company so its own currency is GBP - UK Company so its own currency is GBP
- Payment required to be made in USD - Receivable amount will be received in USD
- USD Buy, GBP Sell - USD Sell, GBP Buy
Which spot rate to be used? Which spot rate to be used?
- 1 GBP = USD 1.5100 or 1 GBP = USD 1.5180 - 1.5100 USD = 1 GBP or 1.5180 USD = 1 GBP
- First case, I will be able to get USD 1.5100 for every GBP - First case, I will be able to get 1 GBP for every 1.5100 USD
- 2nd case, I will be able to get USD 1.5180 for every GBP - 2nd case, I will be able to get 1 GBP for every 1.5180 USD
- Bank will always let us buy less USD for every GBP - Bank will always let us spend more USD to get 1 GBP
- 1 GBP = USD 1.5100 will be used as Spot rate - 1.5180 USD = 1 GBP will be used as Spot rate
Which Forward Rate to be used? Which Forward Rate to be used?
- Today's date - May 1, 2009 - Today's date - May 1, 2009
- Payment Date - August 1, 2009 - Receivable Date - September 1, 2009
- Time duration = 3 months - Time duration = 4 months
- 3 Month Forward 0.51 c pm will be used - 4 Month Forward 0.61 c pm will be used
Forward Rate Calculation? Forward Rate Calculation?
- Forward Rate = Spot rate (+ / -) Forward rate - Forward Rate = Spot rate (+ / -) Forward rate
- C = 0.01 - C = 0.01
- Pm = Premium = This will be deducted from spot rate - Pm = Premium = This will be deducted from spot rate
- Dis = Discount = This will be added in the spot rate - Dis = Discount = This will be added in the spot rate
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