ACCA Financial Management (F9) Certification Practice Exam

What is the ultimate goal of using a money market hedge?

1. To maximize foreign currency gains

2. To mitigate foreign currency exposure

3. To increase liquidity in the domestic market

4. To encourage international investment

The correct answer is: To mitigate foreign currency exposure

The ultimate goal of using a money market hedge is to mitigate foreign currency exposure. This type of hedge involves using domestic and foreign interest rates for securing cash flows in a different currency. By borrowing in one currency and investing in another, a business can lock in the exchange rate for future transactions. This strategy is especially useful for companies that face receivables or payables in foreign currencies, as it helps reduce the impact of adverse fluctuations in exchange rates. By stabilizing expected cash flows and minimizing uncertainty regarding currency values, organizations can effectively manage risks associated with foreign currency transactions. Other options do not align with the primary purpose of a money market hedge. While maximizing foreign currency gains or increasing liquidity may be beneficial in certain contexts, these are not the core focus of a money market hedge. Similarly, encouraging international investment is more about creating favorable conditions for investment rather than managing exposure to currency risk.