ExpertMedium2 marksMultiple Choice
ACCA · Question 26 · Risk Management
Section B - Case 3: Nexus Co
Nexus Co is a UK-based manufacturer of specialized robotics. The company exports to Europe and imports components from Japan. The home currency is the GBP (£).
Nexus Co is due to receive €500,000 from a European customer in 3 months.
Exchange rates available:
Spot rate (EUR/GBP): 1.1520 - 1.1560
3-month forward rate (EUR/GBP): 1.1450 - 1.1500
If Nexus Co uses a forward market hedge, what will be the guaranteed GBP receipt?
Section B - Case 3: Nexus Co
Nexus Co is a UK-based manufacturer of specialized robotics. The company exports to Europe and imports components from Japan. The home currency is the GBP (£).
Nexus Co is due to receive €500,000 from a European customer in 3 months.
Exchange rates available:
Spot rate (EUR/GBP): 1.1520 - 1.1560
3-month forward rate (EUR/GBP): 1.1450 - 1.1500
If Nexus Co uses a forward market hedge, what will be the guaranteed GBP receipt?
Answer options:
A.
£436,681
B.
£434,783
C.
£432,526
D.
£575,000
How to approach this question
Identify the correct forward rate to use. The bank always wins. If you are selling foreign currency to the bank, they will give you the lower amount of home currency. Divide by the higher rate.
Full Answer
B.£434,783✓ Correct
1. Nexus is receiving €500,000. They need to sell these Euros to the bank in exchange for GBP.
2. The quote is EUR per 1 GBP. To convert EUR to GBP, we must divide.
3. The bank will always apply the rate that is most advantageous to the bank (and worst for the customer). Dividing by the higher number (1.1500) gives fewer GBP.
4. £ Receipt = €500,000 / 1.1500 = £434,782.60 (rounds to £434,783).
Common mistakes
Using the 1.1450 rate, which is the rate the bank would use if Nexus were buying Euros.
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