ACCA Advanced Financial Management 2

Question 1

A US company expects to receive GBP 500,000 in three months. To hedge this currency exposure using a forward contract, the company should:

Accepted Answer

Sell GBP three-month forward

Answer

Buy GBP three-month forward

Answer

Buy USD three-month forward

Answer

Enter a GBP futures contract as a buyer

Question 2

Which of the following best describes an interest rate swap?

Accepted Answer

An agreement where two parties exchange fixed-rate interest obligations for floating-rate obligations on notional principal

Answer

A contract granting the right, but not the obligation, to borrow at a specified fixed rate

Answer

A derivative instrument that pays the spread between two reference rates in cash

Answer

A commitment to lend funds at a future date at an interest rate agreed today

Question 3

Interest rate futures are quoted as 100 minus the interest rate. If a futures price falls from 95.20 to 94.70, this implies:

Accepted Answer

Interest rates have risen by 0.50%

Answer

Interest rates have fallen by 0.50%

Answer

The hedge position has produced a profit for a borrower who sold futures

Answer

The implied rate has moved from 5.20% to 4.70%

Question 4

The 'duration' of a bond is most accurately described as:

Accepted Answer

The weighted average time to receipt of all cash flows, used to measure sensitivity to interest rate changes

Answer

The number of years remaining until the bond matures

Answer

The period needed to recover the bond's purchase price from coupon income alone

Answer

The correlation coefficient between the bond's return and benchmark returns

Question 5

Which hedging instrument allows a company to benefit from a favorable exchange rate movement while still providing protection against adverse movements?

Accepted Answer

Currency option

Answer

Forward exchange contract

Answer

Currency futures contract

Answer

Money market hedge

Question 6

When a company's treasury function operates as a 'profit center,' this means that:

Accepted Answer

The treasury is authorised to take speculative positions in financial markets to generate returns beyond hedging costs

Answer

The treasury focuses exclusively on minimizing financing costs with no risk taken

Answer

All treasury costs are directly allocated to individual business divisions

Answer

The treasury only facilitates intercompany cash transfers within the group

Question 7

Which of the following is a feature of exchange-traded derivatives that distinguishes them from over-the-counter (OTC) derivatives?

Accepted Answer

They use standardized contracts traded on a regulated exchange with a central clearing house

Answer

They are tailored to the exact size and date requirements of the user

Answer

They expose the user to significant counterparty credit risk

Answer

They cannot be closed out before the contract expiry date