Question two was focussed on transactions, translation and economic exposure related to foreign currency risk and its management. Part (i) asked candidates to explain the type of exposure the company faced in each situation. Part (ii) required candidates to apply two over-the-counter (OTC) derivative products to manage transactions exposure.

Part (iii) required candidates to assess the translation gain/loss due to the devaluation of a currency. Part (iv) required candidates to discuss how economic exposure, that the company faced, could be managed. Overall, this question was done less well compared to question one.

This question contained four professional marks available for well-structured answers presented in a report format. The presentation of the answers was varied, with some answers given in report style, but many candidates answering the question without paying due attention to what a report should contain.

Answers which gave a report title but then did not structure the answer appropriately gained few professional marks. The same point has been made in all examiner reports, good presentation and structure is essential to gain a good pass, and professional marks are relatively easy to gain.

Part (i) was done well, with the majority of candidates able to explain the exposure the company faced in each case. Credit was given for explanation of the exposure faced even if it was not named. However, just stating the name of the exposure with no explanation gained few marks.

Part (ii) was done adequately but many candidates were not able to estimate the four-month forward rate correctly (many estimated the annual forward rate). Also, in the case of OTC options, many answers did not calculate the opportunity cost of the premium.

Most candidates attempted to make reasonable recommendations and offer alternative hedging strategies. However, like part (b) in question one, the range and depth of the advice was limited.

Part (iii) was generally done very poorly. Common mistakes were not converting the currency into Euros, not getting the exposed percentages correct and not comparing the amounts before and after the devaluation in order to estimate the translation loss.

Relatively few responses were able to discuss whether and how translation exposure should be managed. It seems that whereas many candidates knew what translation exposure was, few were able to apply measurement techniques to assess this in the question scenario.

Part (iv) some reasonable responses were obtained for this part, but again there was a lack of discursive depth to this part.