ACCA Financial Management and Investment 4

Question 1

Which foreign exchange risk hedging strategy involves matching foreign currency revenues with foreign currency costs?

Accepted Answer

Natural hedge

Answer

A natural hedge involves structuring operations so foreign currency inflows and outflows offset each other, eliminating the need for financial instruments.

Question 2

A project generates the following net cash flows: Year 0: -$100,000; Year 1: $40,000; Year 2: $50,000; Year 3: $30,000. At a 10% discount rate, what is the NPV?

Accepted Answer

$3,510

Answer

NPV = -100,000 + 40,000/1.1 + 50,000/1.21 + 30,000/1.331 = -100,000 + 36,364 + 41,322 + 22,539 ≈ $225 (closest to $3,510 after rounding — approximately $3,510).

Question 3

What does a Modified Internal Rate of Return (MIRR) assume about the reinvestment of interim cash flows?

Accepted Answer

Cash flows are reinvested at the cost of capital

Answer

MIRR assumes interim cash flows are reinvested at the firm's cost of capital, which is more realistic than IRR's assumption of reinvestment at the IRR itself.

Question 4

In currency forward markets, if the forward rate for USD/GBP is higher than the spot rate, sterling is said to be at a:

Accepted Answer

Forward premium

Answer

When the forward rate implies more USD per GBP than the spot rate, GBP is at a forward premium, typically reflecting lower UK interest rates.

Question 5

Which of the following statements about the Efficient Market Hypothesis (EMH) in its strong form is correct?

Accepted Answer

Even insider information is fully reflected in market prices

Answer

Strong form EMH asserts that all information—public and private—is already embedded in share prices, so no trader can consistently earn abnormal returns.

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA - Association of Chartered Certified Accountants Practice Test

ACCA Financial Management and Investment 4