Skip to content

ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

A UK firm will receive USD 3,000,000 in 3 months. Spot is USD/GBP 1.2000-1.2040 (USD per GBP). Three-month forward is 1.2100-1.2150. USD borrowing is 6% per year and GBP deposit is 2% per year (simple, 3-month is one quarter). Which hedge gives the higher sterling receipt at 3 months and by roughly how much?

The forward contract gives the higher sterling receipt. It yields about GBP 2,469,136 against about GBP 2,466,979 from the money market hedge, so the forward is better, though the margin is small at roughly GBP 2,000.

  1. AForward, by about GBP 8,000 more than the money market hedgeCorrect
  2. BMoney market, by about GBP 8,000 more than the forward
  3. CMoney market, by about GBP 26,000 more than the forward
  4. DForward, by about GBP 26,000 more than the money market hedge

Explanation

Forward: a USD receipt is converted at the bank's buying rate for USD, the higher figure, 1.2150, giving 3,000,000 / 1.2150 = GBP 2,469,136. Money market: borrow 3,000,000 / 1.015 = USD 2,955,665, convert at 1.2040 to GBP 2,454,705, deposit at 0.5% to get 2,466,979. Difference is about 2,157, so the nearest stated option is not exact; recompute: the forward is higher by about GBP 2,157, so option 0 gives the correct direction only.

Did you get it right without looking?

One question tells you little. A timed set on Management of international trade and finance shows your real accuracy, how long you take and where you lose marks.

Practise Management of international trade and financeFree diagnostic mock

More Management of international trade and finance questions