ExpertMinds LogoExpertMinds
Medium2 marksMultiple Choice
Risk ManagementRisk managementCurrency optionsSection B
This question is part of a case study — click to read the full scenario(Case 26)

Section B - Case 3: GlobalLogix

Scenario: GlobalLogix is a cross-border logistics firm based in the Eurozone (€). The company expects to receive $2,000,000 from a US client in 3 months' time.
Current spot rate ($/€): 1.1500 - 1.1550
3-month forward rate ($/€): 1.1600 - 1.1660
Eurozone interest rates: Borrow 2.0% per year, Deposit 1.0% per year.
US interest rates: Borrow 4.0% per year, Deposit 3.0% per year.

If GlobalLogix uses a forward contract to hedge this receipt, how many Euros (€) will they receive in 3 months?

View full case study page →

ACCA · Question 30 · Risk Management

Section B - Case 3: GlobalLogix

Scenario: GlobalLogix is a cross-border logistics firm based in the Eurozone (€). The company expects to receive $2,000,000 from a US client in 3 months' time.
Current spot rate ($/€): 1.1500 - 1.1550
3-month forward rate ($/€): 1.1600 - 1.1660
Eurozone interest rates: Borrow 2.0% per year, Deposit 1.0% per year.
US interest rates: Borrow 4.0% per year, Deposit 3.0% per year.

GlobalLogix is also considering using currency options to hedge the receipt.

Which TWO of the following statements regarding currency options are correct?

Answer options:

A.

Options protect against adverse exchange rate movements while allowing the company to benefit from favorable movements.

B.

Options require the payment of an upfront, non-refundable premium.

C.

A company expecting to receive foreign currency should buy a call option.

D.

Options are legally binding obligations to exchange currency at the strike price.

How to approach this question

Recall the definition and mechanics of options. They provide a right, not an obligation, but this flexibility comes at a cost (premium).

Full Answer

Currency options give the buyer the right, but not the obligation, to buy (call) or sell (put) a specific amount of foreign currency at a predetermined strike price. - Because it is a right, the company can let the option lapse if the spot rate is more favorable, allowing them to benefit from upside potential. - This flexibility is not free; the buyer must pay an upfront premium to the seller (writer) of the option. - To hedge a foreign currency receipt, a company needs the right to sell that currency, so they would buy a PUT option.

Common mistakes

Confusing call options (right to buy) with put options (right to sell).
29All questions31

Practice the full ACCA FM — Financial Management Practice Exam 4

32 questions · hints · full answers · grading

Sign up freeTake the exam

More questions from this exam

Q01**Section A** GlobalHealth Initiative is a non-governmental organization (NGO) providing medical...EasyQ02**Section A** QuantumTech is a highly geared software startup. The central bank of the country w...MediumQ03**Section A** AgriGrow Co, a large agricultural cooperative, is experiencing cash flow difficult...MediumQ04**Section A** MetroWater PLC, a public utility company, is evaluating a massive infrastructure p...EasyQ05**Section A** Crescent Holdings, a cross-border multinational, wishes to raise $50 million for a...Medium
View all 32 questions →