F9 (FM) – PART G – Section B – CBE MCQs – ACCA

These are ACCA F9 (FM) Financial Management MCQs for Part-F of the Syllabus “Business valuations”.

These multiple-choice questions (MCQs) are designed to help ACCA F9 students to better understand the exam format. We aim to instill in students the habit of practicing online for their CBE exams. By doing so, students can reduce exam stress and prepare more effectively.

Please note:

  • Students should not attempt these MCQs until they have finished the entire chapter.
  • All questions are compulsory, so please do not skip any.

We hope that these MCQs will be a valuable resource for students preparing for the ACCA F9 (FM) exam.

INFORMATION ABOUT THESE CBE MCQs Test/Quiz

Course:ACCF – Association of Chartered Certified Accountants
Fundamental Level:Applied Skills
Subject:Financial Management
Paper:F9 – FR
Chapter and Topic
  • Nature and purpose of the valuation of business and financial assets ,
  • Models for the valuation of shares,
  • The valuation of debt and other financial assets,
  • Efficient market hypothesis (EMH) and practical considerations in the valuation of shares
Questions:
  1. Rose Co
  2. Edwen
  3. Zigto Co
  4. PGT Co
  5. Peony Co
Syllabus Area:F – “Business valuations”
Questions Type:CBE MCQs
Exam Section:Section A

Syllabus Area

These Multiple Choice Questions (MCQs) cover the Syllabus Area Part F of the Syllabus; “Business valuations” of ACCA F9 (FM) Financial Management Module.

Time

These MCQs are not time-bound. Take your time and solve them without stress. Pay proper attention and focus. Do not rush or hesitate

Result

Students will get their F9 CBE MCQs Test results after they finish the entire test. They will also be able to see the correct and incorrect answers, as well as explanations for the incorrect questions.

Types of Questions

MCQs: Choose one from the given options.
Multiple choice: Choose all those answers which seem correct/ or incorrect to you, as per the requirement of the question. Keep your eye on the wording “(select all those which are correct/ or incorrect)“.
Drop-down: Select from the list provided.
Type numbers: Type your answer in numbers as per the requirement of the question.

QUESTION – Rose Co – (01/05)

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14

F9 (FM) - Part G - MCQs - Rose Co

Course: ACCA - Association of Chartered Certified Accountants
Subject: F9 (FM) - Financial Management
Syllabus Area: G - Risk management
Chapter: 19 Foreign currency risk, 20 Interest rate risk
Exam Section: Section B
Question Name: Rose Co
Questions type: MCQs
Time: No Time Limit

INSTRUCTIONS

  1. If you are using mobile, turn on the mobile rotation and solve the MCQs on wide screen for better experience.

REQUEST

  1. Please rate the quiz and give us feedback once you completed the quiz.
  2. Share with ACCA students on social media such as, Facebook Groups, Whatsapp, Telegram, etc.

1 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Rose Co expects to receive €750,000 from a credit customer in the European Union in 6 months' time. The spot exchange rate is €2.349 per $1 and the 6-month forward rate is €2.412 per $1. The following commercial interest rates are available to Rose Co:

Deposit rate Borrow rate
Euros 4.0% per year 8.0% per year
Dollars 2.0% per year 3.5% per year

Rose Co does not have any surplus cash to use in hedging the future euro receipt. It also has no euro payments to make.

Rose Co is also considering using derivatives such as futures, options and swaps to manage currency risk.

In addition, Rose Co is concerned about the possibility of future interest rate changes and wants to understand how a yield curve can be interpreted.

REQUIREMENT

Which of the following statements is correct?

2 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Rose Co expects to receive €750,000 from a credit customer in the European Union in 6 months' time. The spot exchange rate is €2.349 per $1 and the 6-month forward rate is €2.412 per $1. The following commercial interest rates are available to Rose Co:

Deposit rate Borrow rate
Euros 4.0% per year 8.0% per year
Dollars 2.0% per year 3.5% per year

Rose Co does not have any surplus cash to use in hedging the future euro receipt. It also has no euro payments to make.

Rose Co is also considering using derivatives such as futures, options and swaps to manage currency risk.

In addition, Rose Co is concerned about the possibility of future interest rate changes and wants to understand how a yield curve can be interpreted.

REQUIREMENT

Which of the following statements is correct?

3 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Rose Co expects to receive €750,000 from a credit customer in the European Union in 6 months' time. The spot exchange rate is €2.349 per $1 and the 6-month forward rate is €2.412 per $1. The following commercial interest rates are available to Rose Co:

Deposit rate Borrow rate
Euros 4.0% per year 8.0% per year
Dollars 2.0% per year 3.5% per year

Rose Co does not have any surplus cash to use in hedging the future euro receipt. It also has no euro payments to make.

Rose Co is also considering using derivatives such as futures, options and swaps to manage currency risk.

In addition, Rose Co is concerned about the possibility of future interest rate changes and wants to understand how a yield curve can be interpreted.

REQUIREMENT

If Rose Co used a money market hedge, what would be the percentage borrowing rate for the period?

4 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Rose Co expects to receive €750,000 from a credit customer in the European Union in 6 months' time. The spot exchange rate is €2.349 per $1 and the 6-month forward rate is €2.412 per $1. The following commercial interest rates are available to Rose Co:

Deposit rate Borrow rate
Euros 4.0% per year 8.0% per year
Dollars 2.0% per year 3.5% per year

Rose Co does not have any surplus cash to use in hedging the future euro receipt. It also has no euro payments to make.

Rose Co is also considering using derivatives such as futures, options and swaps to manage currency risk.

In addition, Rose Co is concerned about the possibility of future interest rate changes and wants to understand how a yield curve can be interpreted.

REQUIREMENT

What is the dollar value of a forward market hedge in six months' time?

5 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Rose Co expects to receive €750,000 from a credit customer in the European Union in 6 months' time. The spot exchange rate is €2.349 per $1 and the 6-month forward rate is €2.412 per $1. The following commercial interest rates are available to Rose Co:

Deposit rate Borrow rate
Euros 4.0% per year 8.0% per year
Dollars 2.0% per year 3.5% per year

Rose Co does not have any surplus cash to use in hedging the future euro receipt. It also has no euro payments to make.

Rose Co is also considering using derivatives such as futures, options and swaps to manage currency risk.

In addition, Rose Co is concerned about the possibility of future interest rate changes and wants to understand how a yield curve can be interpreted.

REQUIREMENT

What could Rose Co do to reduce the risk of the euro value dropping relative to the dollar before the €750,000 is received?

Your score is

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QUESTION – Risk management – (02/05)

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7

F9 (FM) - Part G - MCQs - Risk management

Course: ACCA - Association of Chartered Certified Accountants
Subject: F9 (FM) - Financial Management
Syllabus Area: G - Risk management
Chapter: 19 Foreign currency risk, 20 Interest rate risk
Exam Section: Section B
Question Name: Edwen
Questions type: MCQs
Time: No Time Limit

INSTRUCTIONS

  1. If you are using mobile, turn on the mobile rotation and solve the MCQs on wide screen for better experience.

REQUEST

  1. Please rate the quiz and give us feedback once you completed the quiz.
  2. Share with ACCA students on social media such as, Facebook Groups, Whatsapp, Telegram, etc.

1 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Edwen Co is based in Country C, where the currency is the C$. Edwen is expecting the following transactions with suppliers and customers who are based in Europe.

One month: Expected receipt of 240,000 euros
One month: Expected payment of 140,000 euros
Three months: Expected receipts of 300,000 euros

A one-month forward rate of 1.7832 euros per $1 has been offered by the company's bank and the spot rate is 1.7822 euros per $1.

Other relevant financial information is as follows:

  • Three-month European borrowing rate: 1.35%
  • Three-month Country C deposit rate: 1.15%

Assume that it is now 1 April.

REQUIREMENT

Do the following features apply to forward contracts or currency futures?

  1. Contract price is in any currency offered by the bank
  2. Traded over the counter

2 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Edwen Co is based in Country C, where the currency is the C$. Edwen is expecting the following transactions with suppliers and customers who are based in Europe.

One month: Expected receipt of 240,000 euros
One month: Expected payment of 140,000 euros
Three months: Expected receipts of 300,000 euros

A one-month forward rate of 1.7832 euros per $1 has been offered by the company's bank and the spot rate is 1.7822 euros per $1.

Other relevant financial information is as follows:

  • Three-month European borrowing rate: 1.35%
  • Three-month Country C deposit rate: 1.15%

Assume that it is now 1 April.

REQUIREMENT

Edwen Co is considering a currency futures contracts.

Which of the following statements about currency futures contracts are true?

  1. The contracts can be tailored to the user's exact requirements.
  2. The exact date of receipt or payment of the currency does not have to be known.
  3. Transaction costs are generally higher than other hedging methods.

3 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Edwen Co is based in Country C, where the currency is the C$. Edwen is expecting the following transactions with suppliers and customers who are based in Europe.

One month: Expected receipt of 240,000 euros
One month: Expected payment of 140,000 euros
Three months: Expected receipts of 300,000 euros

A one-month forward rate of 1.7832 euros per $1 has been offered by the company's bank and the spot rate is 1.7822 euros per $1.

Other relevant financial information is as follows:

  • Three-month European borrowing rate: 1.35%
  • Three-month Country C deposit rate: 1.15%

Assume that it is now 1 April.

REQUIREMENT

Edwen Co is expecting a fall in the value of the C$.

What is the impact of a fall in a country's exchange rate?

  1. Exports will be given a stimulus.
  2. The rate of domestic inflation will rise.

4 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Edwen Co is based in Country C, where the currency is the C$. Edwen is expecting the following transactions with suppliers and customers who are based in Europe.

One month: Expected receipt of 240,000 euros
One month: Expected payment of 140,000 euros
Three months: Expected receipts of 300,000 euros

A one-month forward rate of 1.7832 euros per $1 has been offered by the company's bank and the spot rate is 1.7822 euros per $1.

Other relevant financial information is as follows:

  • Three-month European borrowing rate: 1.35%
  • Three-month Country C deposit rate: 1.15%

Assume that it is now 1 April.

REQUIREMENT

What are the expected dollar receipts in three months using a money market hedge? (to the nearest whole number)

5 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Edwen Co is based in Country C, where the currency is the C$. Edwen is expecting the following transactions with suppliers and customers who are based in Europe.

One month: Expected receipt of 240,000 euros
One month: Expected payment of 140,000 euros
Three months: Expected receipts of 300,000 euros

A one-month forward rate of 1.7832 euros per $1 has been offered by the company's bank and the spot rate is 1.7822 euros per $1.

Other relevant financial information is as follows:

  • Three-month European borrowing rate: 1.35%
  • Three-month Country C deposit rate: 1.15%

Assume that it is now 1 April.

REQUIREMENT

What are the expected dollar receipts in one month using a forward hedge? (to the nearest whole number)

Your score is

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QUESTION – Zigto Co – (03/05)

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4

F9 (FM) - Part G - MCQs - Zigto Co

Course: ACCA - Association of Chartered Certified Accountants
Subject: F9 (FM) - Financial Management
Syllabus Area: G - Risk management
Chapter: 19 Foreign currency risk, 20 Interest rate risk
Exam Section: Section B
Question Name: Zigto Co
Questions type: MCQs
Time: No Time Limit

INSTRUCTIONS

  1. If you are using mobile, turn on the mobile rotation and solve the MCQs on wide screen for better experience.

REQUEST

  1. Please rate the quiz and give us feedback once you completed the quiz.
  2. Share with ACCA students on social media such as, Facebook Groups, Whatsapp, Telegram, etc.

1 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Zigto Co is a medium-sized company whose ordinary shares are all owned by the members of one family. The domestic currency is the dollar. It has recently begun exporting to a European country and expects to receive €500,000 in 6 months' time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigto Co could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigto Co is 4.5% per year.

The following exchange rates are currently available to Zigto Co:

Current spot exchange rate 2.000 euro per $
Six-month forward exchange rate 1.990 euro per $
One-year forward exchange rate 1.981 euro per $

Zigto Co wants to hedge its future euro receipt.

Zigto Co is also trying to build an understanding of other types of currency risk and the potential impact of possible future interest rate and inflation rate changes.

REQUIREMENT

Which of the following statements is/are False?

  1. Transaction risk affects cash flows.
  2. Translation risk directly affects shareholder wealth.
  3. Diversification of supplier and customer base across different countries reduces economic risk.

2 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Zigto Co is a medium-sized company whose ordinary shares are all owned by the members of one family. The domestic currency is the dollar. It has recently begun exporting to a European country and expects to receive €500,000 in 6 months' time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigto Co could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigto Co is 4.5% per year.

The following exchange rates are currently available to Zigto Co:

Current spot exchange rate 2.000 euro per $
Six-month forward exchange rate 1.990 euro per $
One-year forward exchange rate 1.981 euro per $

Zigto Co wants to hedge its future euro receipt.

Zigto Co is also trying to build an understanding of other types of currency risk and the potential impact of possible future interest rate and inflation rate changes.

REQUIREMENT

Which of the following statements are True?

  1. Purchasing power parity tends to hold true in the short term.
  2. Expected future spot rates are based on relative inflation rates between two countries.
  3. Current forward exchange rates are based on relative interest rates between two countries.

3 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Zigto Co is a medium-sized company whose ordinary shares are all owned by the members of one family. The domestic currency is the dollar. It has recently begun exporting to a European country and expects to receive €500,000 in 6 months' time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigto Co could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigto Co is 4.5% per year.

The following exchange rates are currently available to Zigto Co:

Current spot exchange rate 2.000 euro per $
Six-month forward exchange rate 1.990 euro per $
One-year forward exchange rate 1.981 euro per $

Zigto Co wants to hedge its future euro receipt.

Zigto Co is also trying to build an understanding of other types of currency risk and the potential impact of possible future interest rate and inflation rate changes.

REQUIREMENT

What is the one-year expected (future) spot rate predicted by purchasing power parity theory? (to three decimal places)

4 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Zigto Co is a medium-sized company whose ordinary shares are all owned by the members of one family. The domestic currency is the dollar. It has recently begun exporting to a European country and expects to receive €500,000 in 6 months' time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigto Co could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigto Co is 4.5% per year.

The following exchange rates are currently available to Zigto Co:

Current spot exchange rate 2.000 euro per $
Six-month forward exchange rate 1.990 euro per $
One-year forward exchange rate 1.981 euro per $

Zigto Co wants to hedge its future euro receipt.

Zigto Co is also trying to build an understanding of other types of currency risk and the potential impact of possible future interest rate and inflation rate changes.

REQUIREMENT

What is the dollar value of a money market hedge in six months' time? (to the nearest whole number)

5 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Zigto Co is a medium-sized company whose ordinary shares are all owned by the members of one family. The domestic currency is the dollar. It has recently begun exporting to a European country and expects to receive €500,000 in 6 months' time. The company plans to take action to hedge the exchange rate risk arising from its European exports.

Zigto Co could put cash on deposit in the European country at an annual interest rate of 3% per year, and borrow at 5% per year. The company could put cash on deposit in its home country at an annual interest rate of 4% per year, and borrow at 6% per year. Inflation in the European country is 3% per year, while inflation in the home country of Zigto Co is 4.5% per year.

The following exchange rates are currently available to Zigto Co:

Current spot exchange rate 2.000 euro per $
Six-month forward exchange rate 1.990 euro per $
One-year forward exchange rate 1.981 euro per $

Zigto Co wants to hedge its future euro receipt.

Zigto Co is also trying to build an understanding of other types of currency risk and the potential impact of possible future interest rate and inflation rate changes.

REQUIREMENT

What is the dollar value of a forward exchange contract in six months' time? (to the nearest whole number)

Your score is

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QUESTION – PGT Co – (04/05)

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4

F9 (FM) - Part G - MCQs - PGT Co

Course: ACCA - Association of Chartered Certified Accountants
Subject: F9 (FM) - Financial Management
Syllabus Area: G - Risk management
Chapter: 19 Foreign currency risk, 20 Interest rate risk
Exam Section: Section B
Question Name: PGT Co
Questions type: MCQs
Time: No Time Limit

INSTRUCTIONS

  1. If you are using mobile, turn on the mobile rotation and solve the MCQs on wide screen for better experience.

REQUEST

  1. Please rate the quiz and give us feedback once you completed the quiz.
  2. Share with ACCA students on social media such as, Facebook Groups, Whatsapp, Telegram, etc.

1 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

PGT Co, whose home currency is the dollar ($), trades with both customers and suppliers in the European Union where the local currency is the euro (€). PGT Co has the following transactions due within the next six months:

Receipts Payments
3 months 1,000,000 euros 400,000 euros
6 months 500,000 dollars 300,000 euros

The finance director at PGT Co is concerned about the exchange rate due to uncertainty in the economy. He would like to hedge the exchange rate risk and has gathered the following information:

Spot rate (euro per $1) 1.7694 – 1.8306
Three-month forward rate (euro per $1) 1.7891 – 1.8510

PGT Co also has a 12 million loan in dollars. There is increased uncertainty in the economy regarding future interest rates due to impending elections which could lead to a change in political leadership and direction. PGT has never previously managed interest rate risk, but given the uncertainty the finance director is considering using a forward rate agreement.

The following commercial interest rates are currently available to PGT Co:

Deposit rate Borrow rate
Euros 4% 8%
Dollars 2% 3.5%

Assume that PGT Co does not have any surplus cash.

REQUIREMENT

Which TWO of the following statements are TRUE in relation to purchasing power parity?

2 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

PGT Co, whose home currency is the dollar ($), trades with both customers and suppliers in the European Union where the local currency is the euro (€). PGT Co has the following transactions due within the next six months:

Receipts Payments
3 months 1,000,000 euros 400,000 euros
6 months 500,000 dollars 300,000 euros

The finance director at PGT Co is concerned about the exchange rate due to uncertainty in the economy. He would like to hedge the exchange rate risk and has gathered the following information:

Spot rate (euro per $1) 1.7694 – 1.8306
Three-month forward rate (euro per $1) 1.7891 – 1.8510

PGT Co also has a 12 million loan in dollars. There is increased uncertainty in the economy regarding future interest rates due to impending elections which could lead to a change in political leadership and direction. PGT has never previously managed interest rate risk, but given the uncertainty the finance director is considering using a forward rate agreement.

The following commercial interest rates are currently available to PGT Co:

Deposit rate Borrow rate
Euros 4% 8%
Dollars 2% 3.5%

Assume that PGT Co does not have any surplus cash.

REQUIREMENT

Which of the following statements are true if interest rate parity theory is used to forecast the forward value of the dollar for the transaction in six months' time? (assuming interest rates stay the same)

3 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

PGT Co, whose home currency is the dollar ($), trades with both customers and suppliers in the European Union where the local currency is the euro (€). PGT Co has the following transactions due within the next six months:

Receipts Payments
3 months 1,000,000 euros 400,000 euros
6 months 500,000 dollars 300,000 euros

The finance director at PGT Co is concerned about the exchange rate due to uncertainty in the economy. He would like to hedge the exchange rate risk and has gathered the following information:

Spot rate (euro per $1) 1.7694 – 1.8306
Three-month forward rate (euro per $1) 1.7891 – 1.8510

PGT Co also has a 12 million loan in dollars. There is increased uncertainty in the economy regarding future interest rates due to impending elections which could lead to a change in political leadership and direction. PGT has never previously managed interest rate risk, but given the uncertainty the finance director is considering using a forward rate agreement.

The following commercial interest rates are currently available to PGT Co:

Deposit rate Borrow rate
Euros 4% 8%
Dollars 2% 3.5%

Assume that PGT Co does not have any surplus cash.

REQUIREMENT

Which of the following statements about a forward rate agreement (FRA) is/are true?

  1. FRAs can be used to manage interest rate risk on borrowings but not interest rate risk on investments.
  2. FRAs are over the counter contracts.
  3. The user of an FRA has the option to let the contract lapse if the rate is unfavourable.

4 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

PGT Co, whose home currency is the dollar ($), trades with both customers and suppliers in the European Union where the local currency is the euro (€). PGT Co has the following transactions due within the next six months:

Receipts Payments
3 months 1,000,000 euros 400,000 euros
6 months 500,000 dollars 300,000 euros

The finance director at PGT Co is concerned about the exchange rate due to uncertainty in the economy. He would like to hedge the exchange rate risk and has gathered the following information:

Spot rate (euro per $1) 1.7694 – 1.8306
Three-month forward rate (euro per $1) 1.7891 – 1.8510

PGT Co also has a 12 million loan in dollars. There is increased uncertainty in the economy regarding future interest rates due to impending elections which could lead to a change in political leadership and direction. PGT has never previously managed interest rate risk, but given the uncertainty the finance director is considering using a forward rate agreement.

The following commercial interest rates are currently available to PGT Co:

Deposit rate Borrow rate
Euros 4% 8%
Dollars 2% 3.5%

Assume that PGT Co does not have any surplus cash.

REQUIREMENT

What is the cost in six months' time of a money market hedge? (to the nearest whole number)

5 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

PGT Co, whose home currency is the dollar ($), trades with both customers and suppliers in the European Union where the local currency is the euro (€). PGT Co has the following transactions due within the next six months:

Receipts Payments
3 months 1,000,000 euros 400,000 euros
6 months 500,000 dollars 300,000 euros

The finance director at PGT Co is concerned about the exchange rate due to uncertainty in the economy. He would like to hedge the exchange rate risk and has gathered the following information:

Spot rate (euro per $1) 1.7694 – 1.8306
Three-month forward rate (euro per $1) 1.7891 – 1.8510

PGT Co also has a 12 million loan in dollars. There is increased uncertainty in the economy regarding future interest rates due to impending elections which could lead to a change in political leadership and direction. PGT has never previously managed interest rate risk, but given the uncertainty the finance director is considering using a forward rate agreement.

The following commercial interest rates are currently available to PGT Co:

Deposit rate Borrow rate
Euros 4% 8%
Dollars 2% 3.5%

Assume that PGT Co does not have any surplus cash.

REQUIREMENT

What is the three-month dollar receipt of a forward market hedge? (to the nearest whole number)

Your score is

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QUESTION – Peony Co – (05/05)

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2

F9 (FM) - Part G - MCQs - Peony Co

Course: ACCA - Association of Chartered Certified Accountants
Subject: F9 (FM) - Financial Management
Syllabus Area: G - Risk management
Chapter: 19 Foreign currency risk, 20 Interest rate risk
Exam Section: Section B
Question Name: Peony Co
Questions type: MCQs
Time: No Time Limit

INSTRUCTIONS

  1. If you are using mobile, turn on the mobile rotation and solve the MCQs on wide screen for better experience.

REQUEST

  1. Please rate the quiz and give us feedback once you completed the quiz.
  2. Share with ACCA students on social media such as, Facebook Groups, Whatsapp, Telegram, etc.

1 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Peony Co's finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months' time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered a 3 v 12 forward rate agreement at 7.10–6.85.

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580 million pesos, with 200 million pesos being paid in six months' time (from today) and 380 million pesos being paid in 12 months' time (from today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6.5% per year
Pesos 10.0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

REQUIREMENT

In relation to the use of derivatives by Peony Co, which of the following statements is correct?

2 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Peony Co's finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months' time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered a 3 v 12 forward rate agreement at 7.10–6.85.

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580 million pesos, with 200 million pesos being paid in six months' time (from today) and 380 million pesos being paid in 12 months' time (from today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6.5% per year
Pesos 10.0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

REQUIREMENT

In respect of Peony Co managing its interest rate risk, which of the following statements is/are correct?

  1. Smoothing is an interest rate risk hedging technique which involves maintaining a balance between fixed-rate and floating-rate debt.
  2. Asset and liability management can hedge interest rate risk by matching the maturity of assets and liabilities.

3 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Peony Co's finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months' time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered a 3 v 12 forward rate agreement at 7.10–6.85.

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580 million pesos, with 200 million pesos being paid in six months' time (from today) and 380 million pesos being paid in 12 months' time (from today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6.5% per year
Pesos 10.0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

REQUIREMENT

Using exchange rates based on interest rate parity, what is the dollar income received from the project?

4 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Peony Co's finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months' time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered a 3 v 12 forward rate agreement at 7.10–6.85.

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580 million pesos, with 200 million pesos being paid in six months' time (from today) and 380 million pesos being paid in 12 months' time (from today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6.5% per year
Pesos 10.0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

REQUIREMENT

If the interest rate on the loan is 5% when it is taken out, what is the nature of the compensatory payment under the forward rate agreement?

5 / 5

The following scenario relates to questions 1–5.

CASE SCENARIO

Peony Co's finance director is concerned about the effect of future interest rates on the company and has been looking at the yield curve.

Peony Co, whose domestic currency is the dollar ($), plans to take out a $100m loan in three months' time for a period of nine months. The company is concerned that interest rates might rise before the loan is taken out and its bank has offered a 3 v 12 forward rate agreement at 7.10–6.85.

The loan will be converted into pesos and invested in a nine-month project which is expected to generate income of 580 million pesos, with 200 million pesos being paid in six months' time (from today) and 380 million pesos being paid in 12 months' time (from today). The current spot exchange rate is 5 pesos per $1.

The following information on current short-term interest rates is available:

Dollars 6.5% per year
Pesos 10.0% per year

As a result of the general uncertainty over interest rates, Peony Co is considering a variety of ways in which to manage its interest rate risk, including the use of derivatives.

REQUIREMENT

In relation to the yield curve, which of the following statements is correct?

Your score is

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