ACCA Financial Management (F9) Certification Practice Exam

What describes a situation where a financial manager has the option to exercise or lapse an agreement?

1. Currency future

2. Currency option

3. Forward exchange contract

4. Money market hedge

The correct answer is: Currency option

The situation described pertains to a financial manager's ability to exercise or lapse an agreement, which is a defining characteristic of a currency option. A currency option gives the purchaser the right, but not the obligation, to buy or sell a currency at a predetermined rate during a specified period. This flexibility allows the manager to opt in or out of the agreement based on market conditions and the financial strategy at that time. In contrast, other choices like currency futures and forward exchange contracts obligate the parties to execute the agreement at the predetermined price and date, regardless of market changes. Money market hedges involve borrowing and investing in different currencies but do not provide the option of exercising or lapsing an agreement in the same way. Thus, the ability to exercise or not exercise the terms of the contract makes currency options the most appropriate choice in this context.