ACCA AFM December 2026: Which FX Rate to Use in a Hedging Question

In an AFM hedging question, the exchange rate you choose is the answer. Pick the wrong side of the bank's quote and every figure after it is wrong, however neat your workings.

Why this costs marks

FX hedging (forward contracts, money market hedges, futures and options) is a regular fixture in AFM Section A and B questions. Examiners' reports for the paper keep returning to the same theme: candidates know the mechanics but apply the wrong rate, or they stop at a single hedge without comparing the alternatives.

The rate error is mechanical, so it is also the cheapest mark to win back. The bank always quotes in its own favour. If you are receiving foreign currency, you are selling it to the bank, and you get the less generous rate. If you are paying foreign currency, you are buying it, and you pay the more expensive one.

The second leak is the money market hedge. Students borrow or deposit at the wrong rate, or at an annual rate when the exposure is six months. Interest must be time-adjusted, and you borrow at the borrowing rate and deposit at the deposit rate.

The third leak is the conclusion. AFM is a Professional-level paper, so a table of numbers with no recommendation scores poorly. The marker wants the cheapest or best-outcome hedge named, plus one sentence on risk.

Worked example

A UK company will receive $1,500,000 in 6 months. Spot is $1.2500–1.2540 per £1. The 6-month forward is $1.2610–1.2660 per £1.

Wrong answer: $1,500,000 / 1.2610 = £1,189,532. This uses the first number in the quote, which is the rate the bank gives you when it buys pounds. You are not buying pounds from the bank here, you are asking it to sell you pounds.

Correct answer: the company is selling dollars and buying pounds, so the bank sells pounds at the higher dollar rate. $1,500,000 / 1.2660 = £1,184,834.

That is a £4,698 overstatement of the receipt from one wrong rate, and the comparison with the money market hedge is now skewed too.

What to do

1. Write the direction before the rate. Put "receiving $, so buying £ from bank" in the margin first. Then pick the number.

2. Time-adjust every interest rate. A 6-month hedge uses half the annual rate (or the six-month rate if you are given it), and loans use the borrowing rate, deposits the deposit rate.

3. Finish with a recommendation. Compare the outcomes in one small table, name the best hedge, and add one line on what the other methods leave open (basis risk, margin, counterparty, option premium).

Closing

AFM's March 2026 sitting came in at a 44% pass rate, and fixable technique errors like this are a big part of that gap. Check the direction, then the rate. Everything else follows.