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John Moffat.
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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Hedging methods NOT be suitable for hedging
Which of the following hedging methods will NOT be suitable for hedging the euro receipt?
A Forward exchange contract
B Money market hedge
C Currency futures
D Currency swap
The correct answer is D but I couldn’t understand that why Currency Swap is not suitable for hedging the Foreign exchange rate even though it is mentioned in the notes as one of the hedging techniques? Please explain!
You do not state what euro receipt is being referred to.
I would guess that it is a receipt in the near future.
Currency swaps are not relevant for individual ‘one-off’ receipts are are long-term rather than short-term hedging.
I do explain this in my free lectures.
Yes, you are correct that the company expects to receive €1,500,000 in six months’ time. 🙂
Can you please explain what you meant by “individual one-off receipts”?
And the rest of the methods for hedging are short-term such as Forward Contracts, Money Market hedge, Futures, Options?
Thanks for your reply 🙂
Swaps are more relevant if they are borrowing (or depositing) money for a longer period and there is therefore interest each year rather than just one receipt or one period.
The other methods are all suitable for hedging short-term risk.