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9 ACCA Financial Management questions with answers and explanations.
Printable worksheet with answer key
The risk that exchange rates change between agreeing and settling a transaction is called:
Correct answer: Transaction risk
Translation risk arises on consolidating foreign operations.
Purchasing power parity says that exchange rates change to reflect differences in:
Correct answer: Inflation
Interest rate parity reflects differences in interest rates.
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?
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?
Which is a way of hedging currency risk by offsetting receipts and payments in the same currency?
Correct answer: Netting
Matching uses receipts to pay costs in the same currency.
What does a forward exchange contract do?
Correct answer: Fixes the rate for a future date
The rate is agreed now for a transaction in the future.
What is gap exposure in interest rate risk?
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.
What does a forward rate agreement (FRA) do?
Correct answer: Fixes the interest rate for a future period
It is used to hedge interest rate risk.
Which theory says that long-term interest rates reflect expected future short-term rates?
Correct answer: Expectations theory
Liquidity preference says investors want a premium for lending long.