Question 1

Section B - Case 3: LithiumX

Scenario: LithiumX is a cross-border mining company based in the US. It expects to receive €2,000,000 in exactly 3 months from a European client. 
Spot exchange rate: €1.1500 - €1.1550 / $1
3-month forward rate: €1.1600 - €1.1640 / $1
US interest rates: 4% borrow, 2% deposit (annual)
Euro interest rates: 5% borrow, 3% deposit (annual)

Question: If LithiumX uses a forward market hedge, what will be the guaranteed US Dollar ($) receipt in 3 months?

Accepted Answer

Determine whether to multiply or divide by the exchange rate. Since the quote is €/$, and you have €, you must divide. Then, choose the correct side of the spread: the bank always wins, so divide by the higher number to get fewer dollars.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Dividing by the lower rate (1.1600) or using the spot rate instead of the forward rate.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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