Question 1

**Section B - Case 3: AeroFreight Logistics**

*Scenario:* AeroFreight Logistics operates drone deliveries across Europe and Asia. The company is based in the UK (GBP). It owes a supplier €500,000 payable in 6 months. 
Spot rate: €1.1500 - €1.1550 / £1
6-month forward rate: €1.1400 - €1.1460 / £1
UK 6-month borrowing rate: 4% (annual)
Euro 6-month deposit rate: 2% (annual)

**Question 2:** According to Interest Rate Parity (IRR), why is the Euro trading at a forward premium against the GBP?

Accepted Answer

Recall the Interest Rate Parity theory: the currency with the lower interest rate will trade at a forward premium (it will become stronger in the forward market) to offset the interest rate differential.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Assuming higher interest rates make a currency stronger in the forward market. In reality, higher interest rates lead to a forward discount.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

More questions from this exam