ACCA FM 2026: Money Market Hedge — Do You Borrow Dollars or Euros?

If you are receiving foreign currency, you borrow that foreign currency. If you are paying foreign currency, you borrow at home. Get that one sentence right and the money market hedge becomes four lines of arithmetic. Get it backwards and every number after it is wrong.

Why this costs ACCA FM candidates marks

FM came out of June 2026 at a 48% pass rate. Syllabus area G — risk management — turns up in Section A, Section B case questions and occasionally Section C, and the money market hedge is the single most testable calculation in it. It is also entirely mechanical. There is no judgement, no interpretation, nothing to argue about. Which makes throwing marks away on it particularly painful.

The March/June 2024 FM examiner's report picked apart a Section B case (Tamunac Co) built on exactly this. Two errors dominated, and neither of them is a knowledge gap.

Error 1: not pro-rating the interest rates

Rates in the question are annual. Hedges in the question are usually three or six months. The examiner found candidates who simply used the annual figure, and — more revealingly — candidates who pro-rated but did it in their head and got the decimal wrong.

The report singles this out: many candidates used a pro-rated deposit rate of 5% (0.05) when the answer was 0.5% (0.005). A 2% annual deposit rate over three months is 2/4 = 0.5%. Not 5%. That single slip does not just lose the presentation mark — it corrupts the final figure.

Error 2: inverting borrowing and deposit rates

The same report notes candidates who "inverted the rates and therefore incorrectly used a borrowing rate of 0.5% and a deposit rate of 1.5%." Read that back. They deposited at a higher rate than they borrowed at. Free money. If your hedge produces that, the bank in the question has gone into administration.

Sanity check every time: borrowing rates are always higher than deposit rates. If yours are not, you have grabbed the wrong column.

Worked example — receipt hedge

Tamunac Co will receive €1.5m in three months. Home currency is $. Spot is €1.16 = $1. Annual rates: $ borrow 4%, $ deposit 2%; € borrow 6%, € deposit 3%.

Wrong answer: borrow dollars, deposit euros, use annual rates. You will land somewhere near $1,244,307 or $1,337,694 — both of which are sitting there as distractors, because the examiner knows exactly how you will go astray.

Correct answer — $1,280,364. Four steps:

1. Pro-rate. € borrowing 6%/4 = 1.5%. $ deposit 2%/4 = 0.5%.

2. Borrow euros now, an amount that grows to exactly €1.5m in three months, so the receipt repays the loan: €1.5m / 1.015 = €1,477,833.

3. Convert at spot: €1,477,833 / 1.16 = $1,273,994.

4. Deposit the dollars for three months: $1,273,994 × 1.005 = $1,280,364.

The exchange rate risk vanished at step 3. You converted today at a rate you can see, not in three months at a rate you cannot.

For a payment, run it in reverse: deposit the foreign currency now so it grows to the amount you owe, and borrow at home to fund that deposit.

What to do before your next sitting

Write the direction rule on your formula sheet. Receipt = borrow foreign, deposit home. Payment = deposit foreign, borrow home. Two lines. Recall them before you touch a number.

Divide the annual rate on screen, not in your head. In the CBE, type =6%/4 into a cell. The examiner explicitly flagged decimal errors on pro-rating — a spreadsheet does not make them.

Compare the hedge to the forward rate and say which wins. Section C will ask. A number with no recommendation attached is an unfinished answer, and the FM examining team have said as much across multiple reports.

The bottom line

FM sits at 48%, and syllabus area G is one of the few places where full marks are genuinely available to anyone who has drilled the method. The money market hedge does not test whether you understand currency risk. It tests whether you can follow four steps in the right order without inverting a column or fumbling a decimal.

Four steps. Right order. That is the whole exam question.