ExpertMinds LogoExpertMinds
Medium2 marksMultiple Choice
Risk ManagementRisk managementMoney market hedgeSection B
This question is part of a case study — click to read the full scenario(Case 26)

Section B - Case 3: GlobalLogix

Scenario: GlobalLogix is a cross-border logistics firm based in the Eurozone (€). The company expects to receive $2,000,000 from a US client in 3 months' time.
Current spot rate ($/€): 1.1500 - 1.1550
3-month forward rate ($/€): 1.1600 - 1.1660
Eurozone interest rates: Borrow 2.0% per year, Deposit 1.0% per year.
US interest rates: Borrow 4.0% per year, Deposit 3.0% per year.

If GlobalLogix uses a forward contract to hedge this receipt, how many Euros (€) will they receive in 3 months?

View full case study page →

ACCA · Question 27 · Risk Management

Section B - Case 3: GlobalLogix

Scenario: GlobalLogix is a cross-border logistics firm based in the Eurozone (€). The company expects to receive $2,000,000 from a US client in 3 months' time.
Current spot rate ($/€): 1.1500 - 1.1550
3-month forward rate ($/€): 1.1600 - 1.1660
Eurozone interest rates: Borrow 2.0% per year, Deposit 1.0% per year.
US interest rates: Borrow 4.0% per year, Deposit 3.0% per year.

GlobalLogix is considering a money market hedge instead of a forward contract. What is the correct sequence of steps to set up this hedge today?

Answer options:

A.

Borrow Euros, convert to US Dollars at the spot rate, and deposit the US Dollars.

B.

Borrow US Dollars, convert to Euros at the spot rate, and deposit the Euros.

C.

Deposit US Dollars today and convert them to Euros in 3 months at the forward rate.

D.

Borrow US Dollars, convert to Euros at the forward rate, and deposit the Euros.

How to approach this question

Determine the exposure: receiving $. To hedge, you need an offsetting $ liability. Therefore, borrow $ today.

Full Answer

B.Borrow US Dollars, convert to Euros at the spot rate, and deposit the Euros.✓ Correct
A money market hedge involves creating a synthetic forward contract using the spot market and money markets. Since GlobalLogix will receive $ in 3 months, they have a future $ asset. To hedge this, they must create a $ liability today. Steps: 1. Borrow US Dollars today (amount = $2m / (1 + US borrow rate for 3 months)). 2. Convert the borrowed $ into € immediately at today's spot rate. 3. Deposit the € in a Eurozone bank to earn interest for 3 months. In 3 months, the $ receipt from the client pays off the $ loan.

Common mistakes

Confusing the steps for hedging a receipt with hedging a payment.
26All questions28

Practice the full ACCA FM — Financial Management Practice Exam 4

32 questions · hints · full answers · grading

Sign up freeTake the exam

More questions from this exam

Q01**Section A** GlobalHealth Initiative is a non-governmental organization (NGO) providing medical...EasyQ02**Section A** QuantumTech is a highly geared software startup. The central bank of the country w...MediumQ03**Section A** AgriGrow Co, a large agricultural cooperative, is experiencing cash flow difficult...MediumQ04**Section A** MetroWater PLC, a public utility company, is evaluating a massive infrastructure p...EasyQ05**Section A** Crescent Holdings, a cross-border multinational, wishes to raise $50 million for a...Medium
View all 32 questions →