Question 1

Zia is an accountant and wishes to take out a Forward Rate Agreement (FRA)as a hedging instrument. The company treasurer has advised that a short-term interest rate (STIR)future would be better.

Which of the following is true of an STIR?

Options :

A : A STIR can be tailored to the exact needs of the company.

B : A STIR is flexible and the position can be closed quickly and easily.

C : A STIR must be kept for the whole duration of the contract.

D : If interest rates have gone down the price of the future will have fallen.

Answer: B

Question 2

Company M has lost 25% of its revenue in the last three months due to bad debts. One of thereceivables written offwasfroma long standing customer and the other three werefromnew customers. The management accountant has warned the sales team that the company cannot survive any more substantial bad debts.

Which of the following internal controls should be put in place to try and prevent further bad debts?

Options :

A : A credit check should be carried out on each new customer.

B : Credit limits should be set for all customers. However, if the credit limit will cost a sale then sales staff can override this limit.

C : Two sales staff must authorise new customers and sign a form stating that they have done so.

D : An aged analysis of customer balances must be reviewed every month.

E : As soon as a customer payment is overdue they should not be allowed to purchase more until their balance has been reduced.

Answer: A,D

Question 3

P Ltd, a manufacturing company, is considering a new capital investment project to set up a new production line. The initial appraisal shows a healthy net present value of $6,465 millionat a discount rate of 10% as shown in the table below:

However, management is unsure about the demand for theproduct which will be produced and has insisted that the future revenues should be reduced to certainity equivalents by taking 70%, 65% and 60% of the years 1,2, and 3 cash inflows respectively.

What should P do?

Options :

A : Proceed with the project, it has a healthy net present value.

B : Stop the project, it has considerable risk.

C : Put pressure on sales and marketing to re-verify their forecasts.

D : Re-appraise the project using other capital appraisal techniques to get a more balanced view.

Answer: D

Question 4

The acronym VPN stands for.

Options :

A : Verified Private Network

B : Virtual Private Network

C : Very Personal Network

D : Virtual Personal Network

Answer: B

Question 5

A UK manufacturing company has simultaneously:

* purchased a put option to sell USD 1million at an exercise price of GBP1.00 = USD1.65

* sold a call option that grants the option holder the right to buy USD 1million at a price of GBP1.00 = USD1.61(this option has the same maturity date as the put).

Which of the following is a valid explanation for entering into these option positions?

Options :

A : The company expects to receive USD 1million from a customer and wishes to offset the cost of the put option by the premium on the call option

B : The company expects to pay USD 1million to a supplier and wishes to offset the premium from the call option against the cost of the put option.

C : The company expects to receive USD 1million from a customer and wishes to obtain an additional benefit if the USD strengthens beyond GBP 1.00 = USD 1.61

D : The company expects to pay USD 1million to a supplier and wishes to obtain additional protection against the USD strengthening beyond GBP 1.00 = USD 1.65.

Answer: A

Confidently Practice Online with Free CIMAPRO19-P03-1-ENG Exam Cram

Buying Options: