ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance
Dalton plc, a UK company, will receive US$2,400,000 in three months. The current spot rate is US$1.6000 per £1 and the three-month forward rate is US$1.6200 per £1. Spot in three months turns out to be US$1.5600 per £1. By how much is Dalton better off in sterling by having used a forward contract rather than remaining unhedged?
This item is flawed.
- A£38,462 better offCorrect
- B£38,462 worse off
- C£1,500 better off
- D£53,846 better off
Explanation
Forward: 2,400,000/1.62 = £1,481,481. Unhedged: 2,400,000/1.56 = £1,538,462. The unhedged outcome is higher, so the forward leaves Dalton worse off by £56,981. Recomputing the options: none match this, so check: the dollar strengthened, meaning fewer dollars per pound is a stronger pound? Rate falling from 1.62 to 1.56 means the dollar strengthened, giving more pounds unhedged. Hence the forward is worse by £56,981.
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