ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations
A UK company expects to receive US$2 million from a customer in six months. Its treasurer wants to remove the uncertainty about the sterling amount received. Which action is the most appropriate way to achieve this?
The treasurer should enter a forward exchange contract to sell the dollars in six months, which fixes the exchange rate now and so removes uncertainty about the sterling received. Converting at spot later leaves the risk open, and a dollar deposit does not fix the sterling value.
- AEnter a forward exchange contract to sell US$2 million in six monthsCorrect
- BOpen a US dollar deposit account and leave the funds invested indefinitely
- CAsk the customer to pay in advance without any discount
- DWait until the payment date and convert the dollars at the spot rate
Explanation
A forward contract fixes today the exchange rate at which the dollars will be sold in six months, so the sterling receipt is known. Waiting for the spot rate leaves the exposure open. A deposit account does not fix the sterling value, and demanding advance payment is a commercial request that may not be accepted and is not a hedging instrument.
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