In this third ACCA AFM & FM student support blog, I am turning my attention to the presentation of FX hedging and in particular the presentation of the exchange rates.
The rates are always presented as bid(low) – offer (high). The key issue is whether these are in the indirect or direct format.
The indirect format is the prominent in FM. However, in 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.