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FM G Risk management

Written by Mahnoor Sheikh (ACCA)

9 ACCA Financial Management questions with answers and explanations.

Printable worksheet with answer key

All questions with answers
  1. The risk that exchange rates change between agreeing and settling a transaction is called:

    • 1 Basis risk
    • 2 Translation risk
    • 3 Transaction risk
    • 4 Economic risk
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    Correct answer: Transaction risk

    Translation risk arises on consolidating foreign operations.

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  2. Purchasing power parity says that exchange rates change to reflect differences in:

    • 1 Population
    • 2 Interest rates only
    • 3 Inflation
    • 4 Tax rates
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    Correct answer: Inflation

    Interest rate parity reflects differences in interest rates.

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  3. The spot rate is 100 foreign currency units per $1. Annual interest is 8 percent in the foreign currency and 3 percent in dollars. What is the one-year forward rate under interest rate parity?

    • 1 103.92
    • 2 108.00
    • 3 95.37
    • 4 104.85
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    Correct answer: 104.85

    100 x 1.08 / 1.03 = 104.85.

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  4. The spot rate is 100 per $1. Inflation is 6 percent in the foreign currency and 2 percent in dollars. What is the expected spot rate in a year under PPP?

    • 1 106.00
    • 2 104.85
    • 3 94.34
    • 4 103.92
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    Correct answer: 103.92

    100 x 1.06 / 1.02 = 103.92.

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  5. Which is a way of hedging currency risk by offsetting receipts and payments in the same currency?

    • 1 Lagging
    • 2 Factoring
    • 3 Leading
    • 4 Netting
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    Correct answer: Netting

    Matching uses receipts to pay costs in the same currency.

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  6. What does a forward exchange contract do?

    • 1 Removes all risk
    • 2 Guarantees a profit
    • 3 Fixes the rate for a future date
    • 4 Cancels the transaction
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    Correct answer: Fixes the rate for a future date

    The rate is agreed now for a transaction in the future.

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  7. What is gap exposure in interest rate risk?

    • 1 The gap between tax and interest
    • 2 The gap between profit and cash
    • 3 The difference in the amounts of assets and liabilities that reprice at different times
    • 4 The difference between two currencies
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    Correct answer: The difference in the amounts of assets and liabilities that reprice at different times

    Basis risk is when two rates do not move together.

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  8. What does a forward rate agreement (FRA) do?

    • 1 Fixes the tax rate
    • 2 Fixes the share price
    • 3 Fixes an exchange rate
    • 4 Fixes the interest rate for a future period
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    Correct answer: Fixes the interest rate for a future period

    It is used to hedge interest rate risk.

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  9. Which theory says that long-term interest rates reflect expected future short-term rates?

    • 1 Expectations theory
    • 2 Liquidity preference theory
    • 3 Purchasing power parity
    • 4 Market segmentation
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    Correct answer: Expectations theory

    Liquidity preference says investors want a premium for lending long.

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