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ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations

A company's treasurer expects to receive USD 2 million from a customer in three months and the company's functional currency is the euro. The treasurer enters a forward contract to sell the dollars at a fixed rate. Which treasury objective is primarily being pursued?

The treasurer is reducing foreign exchange risk. Selling the dollars forward at a fixed rate locks in the euro value of the expected receipt, removing uncertainty from exchange rate movements. It is not primarily aimed at gearing, variance analysis or tax minimisation.

  1. AReducing exposure to foreign exchange riskCorrect
  2. BMaximising the company's credit rating through lower gearing
  3. CImproving the accuracy of the budget variance analysis
  4. DMinimising the company's corporation tax liability

Explanation

A forward contract fixes the rate at which the future dollar receipt converts to euros, removing uncertainty from exchange rate movements. It does not directly alter gearing, variance analysis or tax. Tax minimisation is wrong because hedging aims at certainty of cash flow, not tax reduction.

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