Page 213 - AFM Integrated Workbook STUDENT S18-J19

Hedging foreign exchange risk

Illustration 6

Parent Co is a UK based company that has a US based subsidiary, Sub Co.
Outside Co is a European company outside the group that trades with both
group companies.

The predicted balances owing to, and owed by, these companies at the end of
the current accounting period are as follows:

Owed by Owed to Currency

Parent Co Sub Co £0.8m

Parent Co Outside Co €2.4m

Outside Co Parent Co €2.2m

Sub Co Parent Co $5.2m

Sub Co Outside Co €1.9m

Outside Co Sub Co $4.1m

Settlement will be made in British pounds (£), the currency of the group parent
company, after netting and matching all amounts owing.

The predicted exchange rates, to be used in the calculations of the balances to
be settled, are as follows:

£1 = $1.20

£1 = €1.10

Required:

Calculate the amounts owing at the end of the accounting period, after
netting and matching.

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