Skip to content

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

Zeta Co (home currency GBP) must pay USD 3,000,000 in six months. Spot is USD 1.2500 per GBP 1. UK six-month borrowing is 3% and deposit rate is 2%; US deposit rate is 1.5%; all rates are for the six-month period. Zeta will use a money market hedge. Which action and sterling cost is correct?

Zeta should buy and deposit USD 2,955,665 now, funded by borrowing GBP 2,364,532 at 3%, and repay GBP 2,435,468 in six months. Discounting the USD payable at the US deposit rate and converting at spot fixes the sterling cost.

  1. ADeposit USD now of 2,955,665 (3,000,000/1.015), funded by borrowing GBP 2,364,532 in sterling; repay GBP 2,435,468Correct
  2. BDeposit USD now of 3,000,000/1.03, borrow GBP at 2%; repay GBP 2,400,000
  3. CBorrow USD 2,955,665 now and convert to sterling; repay GBP 2,435,468
  4. DDeposit USD 3,045,000 now (3,000,000 x 1.015), borrow GBP 2,436,000; repay GBP 2,509,080

Explanation

Deposit USD 3,000,000/1.015 = 2,955,665, costing 2,955,665/1.25 = GBP 2,364,532 now. Borrow this at 3%: 2,364,532 x 1.03 = GBP 2,435,468. The option of multiplying by 1.015 over-hedges, and borrowing USD does not hedge a payable.

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