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

The company will receive GBP and needs to convert to USD, so it should lock in today's rate by selling GBP (buying USD) forward for delivery in three months.

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

In a plain vanilla interest rate swap, one party pays fixed and receives floating (or vice versa) on a notional principal amount, without exchanging the principal itself.

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

A fall in the futures price from 95.20 to 94.70 means the implied interest rate rose from 4.80% to 5.30%, increasing borrowing costs.

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

Duration weights each cash flow by the time of receipt relative to price, giving a single measure that approximates how much a bond's price changes for a 1% change in yield.

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

A currency option gives the holder the right but not the obligation to transact at the strike rate, so if the market rate is better than the strike, the option is abandoned and the better rate is taken.

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA Advanced Financial Management 2