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E4 Valuation and hedging with derivatives

Written by Saad Rahman (ACCA)

8 ACCA New at Expertise level questions with answers and explanations.

Printable worksheet with answer key

All questions with answers
  1. Which valuation method uses net realisable value of assets?

    • 1 The P/E method
    • 2 Asset-based valuation
    • 3 The dividend growth model
    • 4 CAPM
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    Correct answer: Asset-based valuation

    It is an asset-based approach.

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  2. What is a limitation of the P/E valuation method?

    • 1 It uses future cash flows only
    • 2 It depends on finding a comparable company
    • 3 It ignores earnings
    • 4 It needs no estimates
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    Correct answer: It depends on finding a comparable company

    Differences in risk and growth affect it.

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  3. What is a feature of exchange-traded currency futures?

    • 1 They are tailor-made
    • 2 They are standardised and need margin payments
    • 3 They have no basis risk
    • 4 They need no deposit
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    Correct answer: They are standardised and need margin payments

    Standard sizes and dates can make the hedge imperfect.

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  4. What does an OTC currency option give the holder?

    • 1 No protection
    • 2 The right, but not the obligation, to buy or sell at a set rate
    • 3 The obligation to buy or sell
    • 4 A guaranteed profit
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    Correct answer: The right, but not the obligation, to buy or sell at a set rate

    The holder pays a premium.

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  5. Which hedge removes both the risk and the possible gain from a favourable move?

    • 1 A forward contract
    • 2 A currency option
    • 3 Doing nothing
    • 4 Leading and lagging
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    Correct answer: A forward contract

    An option allows the holder to benefit from favourable moves.

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  6. A company must pay FC 600,000 in 3 months. The spot rate is FC 3.00 to $1 and the 3-month foreign deposit rate is 2 percent. What does it deposit now, to the nearest unit?

    • 1 FC 612,000
    • 2 FC 600,000
    • 3 FC 576,000
    • 4 FC 588,235
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    Correct answer: FC 588,235

    600,000 / 1.02.

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  7. What does basis risk mean in a hedge?

    • 1 The risk of tax change
    • 2 The hedge does not move exactly with the exposure
    • 3 The risk of inflation
    • 4 The risk of default by the bank
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    Correct answer: The hedge does not move exactly with the exposure

    It can leave part of the exposure unhedged.

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  8. Behavioural finance suggests that share prices can be affected by:

    • 1 Only dividends
    • 2 Only fundamentals
    • 3 Investor psychology, such as herding and overconfidence
    • 4 Only tax
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    Correct answer: Investor psychology, such as herding and overconfidence

    It challenges strong market efficiency.

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