ACCA Financial Management (F9) Certification Practice Exam

Which of the following hedging methods can involve both buying and selling currency?

1. Currency future

2. Currency option

3. SWAP contracts

4. Forward exchange contracts

The correct answer is: SWAP contracts

The correct answer is the SWAP contracts method, which indeed allows for both buying and selling currencies. A currency swap involves exchanging a particular amount of one currency for another currency at an initial date and agreeing to exchange back at a future date at a predetermined rate. This involves both a buying and selling component because one currency is bought while the other is sold in the transaction. Currency swaps are commonly utilized to manage exposure to exchange rate fluctuations and can provide benefits such as better access to foreign currencies and more favorable interest rates than would otherwise be available. They are particularly useful for entities that have cash flows in different currencies and wish to manage their effects on their overall financial position. The other methods work differently. Currency futures and forwards are agreements that usually involve one party committing to purchase a certain amount of currency at a specified price at a future date. They provide protection against fluctuations in currency values but focus on a single directional transaction rather than allowing for both buying and selling in the same arrangement. Currency options provide the right, but not the obligation, to buy or sell currency at a certain price within a specified time period. While they provide flexibility and protection against currency movements, they do not inherently involve a simultaneous buy and sell transaction within the same structure as a swap.