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)

LithiumX has a subsidiary in Europe. At year-end, the subsidiary's financial statements, denominated in Euros, must be consolidated into LithiumX's US Dollar financial statements.

Question: What type of foreign exchange risk does this consolidation process represent?

Accepted Answer

Distinguish between the three types of FX risk: Transaction (short-term cash flows), Translation (accounting consolidation), and Economic (long-term competitive position).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Confusing translation risk with transaction risk.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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