The Advanced Financial Management syllabus states that there will be at least one question with a focus on syllabus section E, Treasury and advanced risk management techniques. Within Section E, foreign exchange risk management is frequently examined. This article will explain the significance of the information you’ll be given in foreign exchange risk management questions and show you what you’ll be asked to do.
The scenario is adapted from Nutourne Co, Question 2 in the December 2018 exam, which ACCA published. Some of the numbers have been changed. In this question, the closing futures price and spot rate are not given and so the predicted futures rate has to be calculated. (See the article 'Exchange traded foreign exchange derivatives' for an example of when the spot rate and futures price on the day of settlement are given). There is also a spreadsheet provided showing how the calculations could be set out in the spreadsheet tool in the exam.
Scenario
Nutourne Co is a company based in the USA, supplying medical equipment to the USA and Europe. Nutourne Co’s treasury department hedges foreign exchange risk on transactions using forward contracts, the money market, traded futures or traded options.
It is currently 30 November 20X8.
Nutourne Co’s treasury department is currently dealing with a sale to a Swiss customer of CHF12.3 million which has just been agreed, where the customer will pay for the equipment on 31 May 20X9.