ACCA FM · Chapter 14 · Question 2 of 10
A UK company will receive $500,000 in three months. The spot rate is $1.2500 per £1 and the three-month forward rate is $1.2650 per £1. If the company hedges using a forward contract, how much sterling will it receive (to the nearest £)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) £395,257
Explanation
The forward contract fixes the rate at $1.2650 per £1. Sterling received = $500,000 / 1.2650 = £395,257. Dollars must be divided (not multiplied) by the rate because the rate is quoted as dollars per pound. £400,000 is the spot equivalent today, which is not available for a future receipt.
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