ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations
A company expects to receive USD 2 million from a customer in six months and wants to remove the risk that the dollar weakens against its home currency. Which action best achieves this?
The company should enter into a forward contract to sell the dollars at a rate fixed today. This locks in the home-currency value of the receipt regardless of later exchange rate changes. Delaying invoices or borrowing domestically does not hedge the exposure and may create other problems.
- ADelay invoicing the customer until the dollar strengthens
- BEnter into a forward contract to sell the dollars at a rate fixed todayCorrect
- CBorrow in the home currency and hold the proceeds in cash
Explanation
A forward contract fixes the exchange rate for a future receipt, removing the uncertainty from currency movements. Delaying invoicing does not remove the risk and may harm cash flow. Borrowing at home does not hedge the dollar receipt and adds interest cost.
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