Strategic cost issues

[dpkota71]

Dear all,
I have the following open question from SS14, LOS 28b, pg 101 under strategic cost issues, 3rd bullet point
Statement:
It reads ’ forward currency contracts are often short term than the hedging period, requiring contracts be rolled over as they mature (an FX swap)
Q1. Why does it refer to ‘fx swap’ and not another forward currency contract’?
Continuing int he same bullet point.
‘Financial cash outflows when interest rates are high can be costly as the interest that would have been earned on the fund is lost’
Q2. How does the cash outflow situation arise?
Q3. How do we know if the interest rates are high and that is what creates a cash outflow situation.
Where I am struggling is to visualise this situation.
If anyone can kindly help.
Thank you

 

[S2000magician]

dpkota71 wroteear all,
I have the following open question from SS14, LOS 28b, pg 101 under strategic cost issues, 3rd bullet point
Statement:
It reads ’ forward currency contracts are often short term than the hedging period, requiring contracts be rolled over as they mature (an FX swap)
Q1. Why does it refer to ‘fx swap’ and not another forward currency contract’?

The term FX swap means rolling an expiring currency forward into a new currency forward.

dpkota71 wrote:Continuing int he same bullet point.
‘Financial cash outflows when interest rates are high can be costly as the interest that would have been earned on the fund is lost’
Q2. How does the cash outflow situation arise?

When you roll an expiring currency forward (or any forward, for that matter), you pay or receive the difference between the forward rate to which you agreed and the spot rate at expiration. If that difference is negative, you have a cash outflow.

dpkota71 wrote:Q3. How do we know if the interest rates are high …

You phone your bank and ask them if interest rates are high. You could also check Yahoo! Finance.

dpkota71 wrote:… and that is what creates a cash outflow situation.

The level of interest rates doesn’t create the cash flow situation. The level of interest rate determines whether you lose a lot of interest or only a little interest when you have a cash outflow.

dpkota71 wrote:Where I am struggling is to visualise this situation.
If anyone can kindly help.
Thank you

You’re welcome. I hope I helped a bit.