ACCA Financial Management (F9) Certification Practice Exam

In foreign currency risk management, what does matching assets and liabilities involve?

1. Aligning financial statements with local currencies

2. Balancing receivables and payables in the same currency

3. Predicting future exchange rates

4. Avoiding cross-border transactions

The correct answer is: Balancing receivables and payables in the same currency

Matching assets and liabilities in the context of foreign currency risk management specifically refers to the practice of balancing receivables and payables that are denominated in the same currency. By doing so, a company minimizes its exposure to fluctuations in exchange rates. When a firm has assets (such as receivables) and liabilities (like payables) in the same currency, any adverse effects from exchange rate movements can be mitigated. For instance, if a company anticipates receiving payment in euros while simultaneously owing payments in euros, the effects of currency exchange rate changes can offset each other. This strategy allows for better financial planning and less volatility in cash flows related to currency exchanges, which is crucial for maintaining stability in international operations. The other options do not accurately represent the concept of matching assets and liabilities. Aligning financial statements with local currencies (the first option) describes a broader aspect of preparing financial reports rather than the specific practice of matching. Predicting future exchange rates (the third option) involves forecasting and speculation, which is separate from the practical management of existing assets and liabilities. Lastly, avoiding cross-border transactions (the fourth option) does not relate to the matching strategy, as it implies a withdrawal from international commerce rather than a tactic to manage currency risk