Risk Management is part of both my ACCA papers. In ACCA AFM, it has to be tested in the exam to some extent. Mostly, it has been worth at least 20 marks.
FX Risk Management is one of the two big topics that make up Risk Management. The starting point here is to understand how FX rates can be presented in exam questions.
The rates are always presented as bid(low) – offer (high). The issue is whether these are in the indirect or direct format.
The indirect format is the prominent in ACCA FM. However, in ACCA AFM it is a possible layout and the alternative direct format is equally likely.
So, let’s say you are based in the UK and the home currency is GBP (£). The indirect presentation would show “FX per £1”. For instance:
$1.5000 – $1.5500 /£
However, the direct presentation is change this to “£ per FX”, like this:
£0.6452 – £0.6667/$
Clearly understanding the presentation of FX rates is the starting point for selecting the correct rate to convert FX back to the home currency.
To do this under exam pressure, this is a challenge and this is why I have developed some quick rules like “R & R” and “Direct X”.
For AFM candidates, they have to be aware that they can see both presentations in the same question.
For example, spot & forward rates maybe direct but, futures & options as indirect.