ExpertMedium2 marksMultiple Choice
ACCA · Question 13 · Risk Management
'RareEarth Imports' is based in the UK and must pay a supplier in USD in 3 months. The finance manager is choosing between a forward exchange contract and a money market hedge.
Which of the following is a characteristic of a forward exchange contract compared to a money market hedge?
'RareEarth Imports' is based in the UK and must pay a supplier in USD in 3 months. The finance manager is choosing between a forward exchange contract and a money market hedge.
Which of the following is a characteristic of a forward exchange contract compared to a money market hedge?
Answer options:
A.
A forward contract allows the company to benefit if the exchange rate moves in its favor.
B.
A forward contract is a binding agreement that fixes the exchange rate, requiring no upfront cash flow.
C.
A forward contract is created by borrowing in one currency and depositing in another.
D.
A forward contract can be easily cancelled at any time without penalty.
How to approach this question
Understand the mechanics of a forward contract (an OTC agreement to buy/sell at a fixed rate in the future) versus a money market hedge (synthetic forward using spot and interest rates).
Full Answer
B.A forward contract is a binding agreement that fixes the exchange rate, requiring no upfront cash flow.✓ Correct
A forward exchange contract is a binding agreement made today to exchange currencies at a fixed rate at a specific future date. It requires no upfront cash flow. In contrast, a money market hedge involves immediate cash flows (borrowing in one currency, converting at spot, and depositing in the other). Neither method allows the user to benefit from favorable exchange rate movements (unlike currency options).
Common mistakes
Confusing forward contracts with currency options (Option A) or money market hedges (Option C).
Practice the full ACCA FM — Financial Management Practice Exam 3
32 questions · hints · full answers · grading
More questions from this exam
Q01A global wildlife conservation NGO, 'FaunaProtect', is evaluating its financial management object...EasyQ02A national government has recently implemented an expansionary monetary policy to stimulate the e...MediumQ03'CloudSync', a rapidly growing SaaS (Software as a Service) startup, is experiencing cash flow di...MediumQ04'AgriGrow', an organic fertilizer producer, uses 10,000 tonnes of raw compost annually. The cost ...EasyQ05'SteelForge Inc' is deciding between two heavy forging machines. Machine A has a life of 3 years ...Medium