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For Specimen 2016 Q21.
the six month forward rate is 12.805-12.889.
and the answer is 5m/12.805=$390,472For Dec 14 Q3.
Six-month forward exchange rate: 4·2302–4·2606 euros per $
the Future dollar value using the forward contract = €1,200,000/4·2606 = $281,651i am quite confuse at which rate to use.
shouldnt we be using 12.889 to convert to dollar?I assume that you are asking about the specimen exam on the ACCA website.
If you are, then question 21 is not about exchange rates at all!With regard to Q3 of the December 2014 exam, they are selling euros to convert to dollars and therefore we use the higher exchange rate. (The reason for two rates is that the bank makes a profit on the difference – so we always use the one that it worse for us! Converting the euros to dollars at the higher of the two rates gives a lower $ receipt to us.)
All of this is explained in detail in my free lectures on foreign exchange risk management – I do suggest that you watch them! (The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
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