In this question they say that we want certain sum of euro few days from now so we borrow today in our home currency that is HKD and enter into a currency swap. Int rates of Euro and HKD have been given.
Can someone explain how this transaction will fair through and question asked us the annual fixed int rate payment for which we used euro rates why is that?
Vedant ChouhanAdvanced
CFAI mock Derivative
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Let me explain in hindi……
The concept is based on “Aapna ghar me hero……” do you remember? of course, if you’ve taken classes from me….
Step 1 : What does Mehta want?
Ans – He want’s Euro Based funding for one year. This means ussko Euro pe interest dene ka mann hay.
Step 2 : Why doesn’t he directly borrow Euro 25 million?
Ans – Since Mehta Hongkong ka hay, Euro ke log ussko firangi treat karte hay!….shakh se dekhte hay and therefore, zyaada rate charge karte hay.
Step 3 – So what should Mehta do?
Ans – Mehta should borrow HKD equivalent of Euro 25million and then enter into a swap, jsme Mehta Euro pe interest pay karega and HKD pe interest paayega. So, Mehta ka jo HKD pe interest jaa raha hay bazaar me wo cut jaayega and net net Euro interest jaayega. Yehi to mehta ka mann tha in Step 1 and ye wo achieve kar liya at a lower cost.
So sir, aapne ko kya nikalna hay?
Ans – We have to find out the Euro interest rate as the SFR that Mehta has to pay……1-dL/Sum(d)
Maaza aaya?
Sir but in the solution provided they have used HK dollars spot interest rates (by mistake).
yess right they have used rates of hkd by mistake. In sol they have written euros but used hkd
Haha bohot maja aa gaya sir… aapke words yaad the “apne ghar me hero” buss thoda concept brush up ka zarurat tha… ekdum clear ho gaya sir…
Thanks alot !!!