ExpertMedium2 marksMultiple Choice
ACCA · Question 16.5 · Risk Management
Section B - Case 1: Verdant Yields Co
Scenario: Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year.
Question 5: Verdant Yields expects to receive a large payment in Euros in three months. The treasury team believes the Euro will depreciate against their home currency over this period.
Which internal hedging technique should Verdant Yields attempt to negotiate with the customer?
Section B - Case 1: Verdant Yields Co
Scenario: Verdant Yields Co is an organic avocado exporter. The business is highly seasonal. Annual credit sales are $18,250,000. The current trade receivables balance is $3,000,000. Assume a 365-day year.
Question 5: Verdant Yields expects to receive a large payment in Euros in three months. The treasury team believes the Euro will depreciate against their home currency over this period.
Which internal hedging technique should Verdant Yields attempt to negotiate with the customer?
Answer options:
A.
Lagging the receipt
B.
Leading the receipt
C.
Entering into a forward exchange contract
D.
Matching
How to approach this question
Identify that the question asks for an *internal* hedging technique. If the foreign currency you are going to receive is losing value, do you want it sooner or later?
Full Answer
B.Leading the receipt✓ Correct
If the Euro is expected to depreciate, the receipts will be worth less in the home currency in three months. To mitigate this, the company should try to 'lead' the receipt—that is, encourage the customer to pay earlier than the due date. A forward contract is an external technique, and lagging would exacerbate the loss.
Common mistakes
Choosing a forward contract (Option C) because it is a valid hedge, missing the word 'internal' in the question prompt.
Practice the full ACCA FM — Financial Management Practice Exam 5
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