The Following Data Is Provided for the Fair Value of a Share

question 8

Multiple Choice

The following data is provided for the fair value of a share portfolio,and the fair value of a forward contract taken out on 1 July 2014 to 'hedge' movements in the fair value of the shares.Assume the hedge was highly effective at inception of the hedge. $$\begin{array} { | l | l | l | } \hline \text { Date } & \text { Fair value of shares } & \text { Fair value of forward contract } \\\hline \text { 1 July } 2014 & \$ 10000000 & \text { Nil } \\\hline 30 \text { June } 2015 & \$ 9256000 & \$ 689000 \\\hline 30 \text { June } 2016 & \$ 9588000 & \$ 254000 \\\hline 30 \text { June } 2017 & \$ 10586000 & ( \$ 721000 ) \\\hline\end{array}$$ Which of the following statements is true?

• A) It is not an effective hedge as there was a difference of $10 000 000 between the fair values of the shares and the forward contract at inception.
• B) It is not an effective hedge as a forward contract cannot be used as a hedging instrument.
• C) It is an effective hedge as the movement in the fair value of the hedging instrument between 1 July 2014 and 30 June 2017offset movements in fair value of the shares in the same period, which is within the 80-125 per cent hedge effectiveness range.
• D) It is not an effective hedge as the movements in the fair value of the hedging instrument failed to offset movements in the fair value of the shares and stay within the 80-125 per cent hedge effectiveness range throughout the period to 30 June 2017.

---

Definitions:

Performance Measure

Metrics or indicators used to assess, compare, and track performance or productivity, often in the context of business objectives or goals.

Cost-Per-Action

An online advertising payment model where payments are based solely on qualifying actions such as sales or registrations.

Conversion Rate

A metric that measures the percentage of visitors who take a desired action, indicating the effectiveness of a marketing strategy or webpage.

Performance Measure

Quantitative or qualitative indicators used to evaluate the effectiveness, efficiency, and quality of an organization's activities or employee's work.