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ACCA Strategic Professional · Advanced Financial Management · The use of financial derivatives to hedge against forex risk

Brindle plc, a UK company, will receive US$2,400,000 in three months. The spot rate is US$1.2500/£ and the three-month forward rate is US$1.2600/£. Brindle enters a forward contract to sell the dollars. What sterling amount will Brindle receive?

Brindle receives £1,904,762. The forward contract fixes the conversion at the forward rate of US$1.2600/£, so the US$2,400,000 is divided by 1.2600. The spot rate is irrelevant because the receipt is converted at the contracted forward rate.

  1. A£1,920,000
  2. B£1,904,762Correct
  3. C£1,885,000
  4. D£3,024,000

Explanation

Dollars received are converted at the forward rate: 2,400,000 / 1.2600 = £1,904,762. Using the spot rate gives £1,920,000, which is wrong because the forward contract locks in the forward rate. Multiplying instead of dividing gives the absurd £3,024,000.

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