E4 Valuation and hedging with derivatives

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

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

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

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

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

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

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

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