ACCA Financial Management (F9) Certification Practice Exam

Which financial instrument allows you to fix an exchange rate now for future settlement?

1. Currency futures

2. Money market hedge

3. Forward exchange contracts

4. Currency options

The correct answer is: Forward exchange contracts

Forward exchange contracts are financial instruments specifically designed to lock in an exchange rate for a future transaction. By entering into a forward contract, a business or investor can commit to a specific exchange rate today for a currency exchange that will occur at a predetermined date in the future. This allows them to hedge against fluctuations in exchange rates, thereby providing certainty regarding costs and revenues when transactions are conducted across different currencies. The importance of this instrument lies in its ability to mitigate the risks associated with currency movements over time. By fixing the rate now, entities can avoid the uncertainty of future currency market volatility. Other instruments, while related to currency management, operate differently. Currency futures are standardized contracts traded on exchanges and may not be tailored to specific transaction needs. Money market hedges involve borrowing and lending in different currencies, which can be complex and not as straightforward as locking in an exchange rate. Currency options provide the right, but not the obligation, to exchange at a certain rate and involve a premium, adding complexity and potential cost, which is not the case with forward contracts.