ExpertMedium2 marksMultiple Choice
ACCA · Question 26.1 · Risk Management
Section B - Case 3: AeroFreight Logistics
Scenario: AeroFreight Logistics operates drone deliveries across Europe and Asia. The company is based in the UK (GBP). It owes a supplier €500,000 payable in 6 months.
Spot rate: €1.1500 - €1.1550 / £1
6-month forward rate: €1.1400 - €1.1460 / £1
UK 6-month borrowing rate: 4% (annual)
Euro 6-month deposit rate: 2% (annual)
Question 1: If AeroFreight uses a forward market hedge, what will be the exact GBP cost of the €500,000 payment in 6 months?
Section B - Case 3: AeroFreight Logistics
Scenario: AeroFreight Logistics operates drone deliveries across Europe and Asia. The company is based in the UK (GBP). It owes a supplier €500,000 payable in 6 months.
Spot rate: €1.1500 - €1.1550 / £1
6-month forward rate: €1.1400 - €1.1460 / £1
UK 6-month borrowing rate: 4% (annual)
Euro 6-month deposit rate: 2% (annual)
Question 1: If AeroFreight uses a forward market hedge, what will be the exact GBP cost of the €500,000 payment in 6 months?
Answer options:
A.
£432,900
B.
£434,783
C.
£436,300
D.
£438,596
How to approach this question
Identify the correct forward rate. The company needs to buy Euros (sell GBP). The bank will give the worst rate for the customer, which is the lower number of Euros per GBP (1.1400). Divide the Euro amount by this rate.
Full Answer
D.£438,596✓ Correct
AeroFreight needs to buy €500,000. The bank will sell Euros to the company at the lower exchange rate (fewer Euros per £1), which is €1.1400.
Cost in GBP = €500,000 / 1.1400 = £438,596.49.
Common mistakes
Dividing by the higher rate (1.1460) resulting in £436,300.
Practice the full ACCA FM — Financial Management Practice Exam 5
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