ACCA Financial Management (F9) Certification Practice Exam

In a money market hedge for a foreign currency receipt, what is done immediately after borrowing the foreign currency?

1. Deposit the foreign currency

2. Convert it back to home currency

3. Sell the foreign currency on the market

4. Repay the home currency loan

The correct answer is: Convert it back to home currency

In a money market hedge for a foreign currency receipt, the key action taken immediately after borrowing the foreign currency is to convert it back to the home currency. This step is crucial because the purpose of the hedge is to lock in an exchange rate that will mitigate the risk of fluctuations in the foreign exchange market. When a company expects to receive a foreign currency in the future, it can borrow the equivalent amount in that foreign currency. Immediately thereafter, converting that borrowed amount into the home currency secures the current exchange rate. By doing this, the company eliminates uncertainty about potential currency depreciation before the actual receipt of funds. This approach allows the business to manage currency exposure effectively. It ensures that when the actual foreign currency payment is received later, the company is not adversely affected by unfavorable movements in exchange rates. Additionally, the amount converted can later be used to repay the home currency loan, effectively using the foreign currency receipt to settle the obligation. The other options involve steps that do not align with the immediate objective of a money market hedge in this context. For instance, depositing the foreign currency or selling it on the market could introduce additional risk or complexity. Repaying the home currency loan would typically occur at a later stage in the hedging process, after the