G Formulas

Question 1

Increase in value?

Answer 1

Buy back - original value

Question 2

Annualising for 50 days

Answer 2

(1 + (Increase in value / original value)) ^ (365/50) -1

Question 3

Borrowing rate for 3 months?

Answer 3

(1 + annual borrow) ^ (3/12) -1

Question 4

Amount to borrow

Answer 4

Receipt from subsidiary / borrowing rate

Question 5

Amount to deposit

Answer 5

Amount to borrow / closing spot rate

Question 6

Annual interest paid?

Answer 6

(Amount borrowed * (Current rate % + borrowing rate %)) / 100

Question 7

Annual interest received?

Answer 7

(Amount deposited * (Current rate % + deposit rate %)) / 100

Question 8

Relative PPP?

Answer 8

Today’s spot exchange rate after one year * ((1 + variable currency inflation rate) / (1 + base currency inflation rate))

Question 9

Interest rate parity?

Answer 9

Spot exchange rate * ((1 + variable currency interest rate) / (1 + base currency interest rate))

Question 10

Fisher effect?

Answer 10

(1 + nominal interest rate) = (1 + real rate)(1 + inflation rate)

Question 11

What is the international fisher effect calculation the same as?

Answer 11

Interest rate parity

Question 12

Forward rate?

Answer 12

Income/closing rate on forward

Question 13

Nero Co’s cash flow forecast shows that it expects to borrow $2m from Goodfellow’s Bank in four months for three months. The company is concerned that interest rates will have risen by the time the loan is taken out. The interest rate is 5%, and Helpy Bank offers this on the required FRA.

What FRA is needed?

Answer 13

A 4-7 FRA at 5%

Question 14

S_o?

Answer 14

Today’s spot exchange rate

Question 15

H_c in relative PPP?

Answer 15

Variable currency (foreign) inflation rate

Question 16

H_b in relative PPP?

Answer 16

Base currency (domestic) inflation rate

Question 17

I_c in IRP?

Answer 17

Variable currency interest rate

Question 18

I_b in IRP?

Answer 18

Base currency interest rate

Question 19

Get fixed-rate interest rate over 3 months? (money market hedge)

Answer 19

% rate * 3/12

Question 20

Calculate forward exchange rate?

Answer 20

Spot rate * (H_c / H_i)^number of years

Question 21

Amonut received from financial institution (FRA)

Answer 21

Actual rate of interest - spread (one working)

Question 22

Payment made to the financial institution (FRA)

Answer 22

Spread working - actual interest working

Question 23

Annual cost of loan?

Answer 23

(Sum paid - sum received) / (Sum received)

Question 24

Fisher effect formula?

Answer 24

(1 + nominal interest rate) = (1 + real)(1 + inflation)

Question 25

FEC cost?

Answer 25

Lead payment / forward exchange rate

Question 26

Net cost of borrowing (FRA)

Answer 26

Interest paid on loan - payment from bank

Question 27

What does an FRA rate fix (upper or lower)

Answer 27

The upper

Question 28

How is exchange rate quoted?

Answer 28

Foreign to domestic

Question 29

When there is payment in Forex?

Answer 29

Always go for the low rate

Question 30

When there is a receipt in Forex/

Answer 30

Always go for the high rate

Question 31

Money market hedging process? (for receipts)

Answer 31

Borrow in foreign market Divide by borrowing rate Divide by spot rate (high rate) Deposit in home market Multiply by deposit rate Get outcome of hedge

Question 32

Money market hedging process? (for payments)

Answer 32

Borrow in foreign market Divide by deposit rate Divide by spot rate (low rate) Deposit in home market Multiply by borrow rate Get outcome of hedge

Question 33

What currency is the numerator in IRP? (Foreign or domestic)

Answer 33

Foreign

Question 34

Is spot rate or forward exchange rate used in money market hedge?

Answer 34

Spot rate

Question 35

Expected to receive €750000 from a credit customer in EU in 6 month's time. What currency does the company borrow in?

Answer 35

Euros

Question 36

If interest rate in an FRA is 5%, but actual interest rates are higher? (company and bank)

Answer 36

The bank pays the company

Question 37

If interest rate in an FRA is 5%, but actual interest rates are lower? (company and bank)

Answer 37

The company pays the bank

Question 38

When starting a money market hedge, should foreign or domestic be the first rate used?

Answer 38

Always foreign