E4 Valuation and hedging with derivatives

Written by Saad Rahman (ACCA)

ACCA · New at Expertise level · 8 questions

Name: ____________________ Date: ____________

Which valuation method uses net realisable value of assets?
- A The P/E method
- B Asset-based valuation
- C The dividend growth model
- D CAPM
What is a limitation of the P/E valuation method?
- A It uses future cash flows only
- B It depends on finding a comparable company
- C It ignores earnings
- D It needs no estimates
What is a feature of exchange-traded currency futures?
- A They are tailor-made
- B They are standardised and need margin payments
- C They have no basis risk
- D They need no deposit
What does an OTC currency option give the holder?
- A No protection
- B The right, but not the obligation, to buy or sell at a set rate
- C The obligation to buy or sell
- D A guaranteed profit
Which hedge removes both the risk and the possible gain from a favourable move?
- A A forward contract
- B A currency option
- C Doing nothing
- D Leading and lagging
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?
- A FC 612,000
- B FC 600,000
- C FC 576,000
- D FC 588,235
What does basis risk mean in a hedge?
- A The risk of tax change
- B The hedge does not move exactly with the exposure
- C The risk of inflation
- D The risk of default by the bank
Behavioural finance suggests that share prices can be affected by:
- A Only dividends
- B Only fundamentals
- C Investor psychology, such as herding and overconfidence
- D Only tax

Answer key

1. B, 2. B, 3. B, 4. B, 5. A, 6. D, 7. B, 8. C