Question 1

Zia is an accountant and wishes to take out a Forward Rate Agreement (FRA)as a hedging instrument. The company treasurer has advised that a short-term interest rate (STIR)future would be better.

Which of the following is true of an STIR?

Options :

A : A STIR can be tailored to the exact needs of the company.

B : A STIR is flexible and the position can be closed quickly and easily.

C : A STIR must be kept for the whole duration of the contract.

D : If interest rates have gone down the price of the future will have fallen.

Answer: B

Question 2

R is a company running gas-fired power stations in Western Europe. The Risk Committee hasjust received a reportthata power station built to the same design and specification in a developing country has recently collapsed. The causes of the collapse are unclear,but if something similiar were to happen in Europe the consequencesfor Rcould be catastrophic.

Which of the following actions being considered by the Risk Committee are ethical?

Options :

A : Commission a reputable firm of structural engineers to carry out a review of all power stations owned by R.

B : Decide that the information available to date is too uncertain to take any action for now.

C : Send experts employed by R to the site of the collapse so that they can gather information first hand on what happened.

D : Issue a press release confirming that all R-s power stations are 'entirely safe'.

E : Attempt to increase the level of insurance cover against this type of eventuality.

F : Draw up contingency plans in case some ofR-s power stations need to be shut down.

Answer: A,C

Question 3

Which TWO of the following are reasons for a company to comply with the Committee of Sponsoring Organisations of the Treadway Commission 2017 Enterprise Risk Management Framework (COSO Framework)?

Options :

A : Complying with the COSO Framework will mean all employees of a company will comply with internal controls

B : Complying with the COSO Framework will mean that a company-s internal controls will work properly

C : Complying with the COSO Framework will mean there is a good structure to a company-s risk management system

D : Complying with the COSO Framework will mean that all staff will understand a company-s risk management system

E : Complying with the COSO Framework will improve a company-s reputation

Answer: A,C

Question 4

KLtdisan on-line travel agency specialising in budget package holidays to a small number of popular locations. The holidays that it sells are made up of a 'package' of flights, hotel accommodation and food. K Ltd's Finance Director is concerned that the company'sscope of operation is too narrow and wishesto diversify.

IdentifyTWOactions that K Ltdshould take immediately.

Options :

A : Set up a number of activity holidays; adventure, sports and trekking for example.

B : Bulk book cruise accommodation and create a special package deal for retired couples.

C :

Expand the number of locations it currently serves.

D : Re-image the locations it currently serves to make them more exotic and family friendly.

E : Review the customer base looking at feedback, repeat sales and single visit statistics.

F : Engage market researchers to look at future trends in holiday requirements.

Answer: A

Question 5

Company W produces mobile phone components and has recently tendered for a substantial contract. The results of the tendering process will not become available until three months from now. If the company is successful it will require 2,000 units of a commodity which is currently traded in an open commodity market for $740 per unit. However, there has been speculation that this commodity could increase substantially in price over the next three months and so the company is considering purchasing the commodity now and storing it for three months.

The funds to buy the commodity would be borrowed at an annual interest rate of 7% and the storage cost of the product would be $5.40 per unit per month. The storage costs would be paid at the end of the three month storage period.

Which of the following represents the gain or loss (to the nearest thousand dollars) that will accrue to Company W assuming that the price of the commodity rises to $800 in three months' time?

Options :

A : $62,000 gain

B : $95,000 gain

C : $88,000 gain

D : $16,000 loss

Answer: A