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: What is the first step LithiumX must take to set up a money market hedge for this €2,000,000 receipt?

Accepted Answer

A money market hedge for a receipt involves creating a liability in the foreign currency to offset the future asset. Therefore, you borrow the foreign currency today.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Confusing the steps for hedging a receipt (Borrow foreign, convert, deposit domestic) with hedging a payment (Borrow domestic, convert, deposit foreign).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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