THE HISAB SCHOOL OF ACCOUNTANCY

Certified Finance and Accounting Professional Stage Examination

MOCK EXAM – SUMMER 2021

May 25, 2021
3 hours – 100 marks
Additional Reading Time – 15 minutes

Business Finance Decisions

Instructions to examinees:
(i) Answer all FIVE questions.
(ii) Answer in black pen only.
____________________________________________________________________________________________

Q1. Corona Trading Limited (CTL) is due to pay a UK supplier £1 million in three months’ time on
account of ventilators imported. It is now 1st May, 2021.

Exchange rates quoted today are:

£/$
Spot Rates 0.5120 - 0.5152
1-month forward rate 0.5141 - 0.5171
3-month forward rate 0.5171 - 0.5202

Interest rates in both countries are as follows:

United Kingdom 5 – 5.5%

United States 2 – 2.4%
The detail of futures is given in the following grid.

£1
June $1.9305
September $1.9170
December $1.9005

Margin cost is $1,000 per contract. The contract size of £100,000 has been chosen to avoid under- or
over-hedging. The usual contract size is £62,500.

Information relating Options market is detailed below.

Call Option Put Option

June September June September
Strike Price ($)
--------------- cents per £1 ---------------
1.90 2.88 3.55 0.15 0.28
1.92 1.59 2.32 1.00 1.85
1.94 0.96 1.15 2.05 2.95

The contract size of £250,000 has been chosen to avoid under- or over-hedging. The usual contract size is
£62,500.

Required:
Devise the best hedging strategy for.CTL based on effective exchange rate calculation if exchange rate is
expected to move to $/£ 1.9533 – 1.9656 on August 1st, 2021. (15)

The HISAB School of Accountancy