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ACCA Strategic Professional · Advanced Financial Management · The role of the treasury function in multinationals

Zeta plc's treasury policy requires a hedge of at least 80% of forecast net foreign currency receipts. Forecast receipts are USD 5.0 million in 6 months. The treasurer sells USD 3.6 million forward. What is the position against the policy, and what is the unhedged exposure?

The hedge covers 3.6 of 5.0 million, which is 72%, below the 80% minimum required by policy. The policy is therefore breached, and the unhedged exposure is USD 1.4 million. A hedge of at least USD 4.0 million would have been needed.

  1. APolicy breached; unhedged exposure USD 1.4 million, and hedge is 72% of forecastCorrect
  2. BPolicy met; unhedged exposure USD 1.4 million, and hedge is 72% of forecast
  3. CPolicy breached; unhedged exposure USD 3.6 million
  4. DPolicy met; unhedged exposure USD 0.4 million

Explanation

Hedge ratio = 3.6/5.0 = 72%, below the 80% minimum, so the policy is breached (the minimum hedge would be USD 4.0 million). Unhedged exposure = 5.0 - 3.6 = USD 1.4 million. Other options misstate the ratio or confuse the hedged and unhedged amounts.

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