IMANET IMANET Certifications CMA Questions & Answers

• Question 941:

  If risk is purposely undertaken in the foreign exchange market, the investor in foreign exchange then becomes.

  A. A speculator

  B. An arbitrageur

  C. Involved in hedging

  D. An exporter

  Correct Answer: A

  An individual who purposely accepts foreign exchange risk is a speculator. Speculators buy and sell foreign exchange in anticipation of favorable changes in rates.

• Question 942:

  Exchange rates are determined by

  A. Each industrial country's government

  B. The International Monetary Fund.

  C. Supply and demand in the foreign exchange market.

  D. Exporters and importers of manufactured goods.

  Correct Answer: C

  Although currencies can be supported by various means for short periods, the primary determined of exchange rates is the supply of, and demand for, the various currencies. Under current international agreements, exchange rates are allowed to "float ". During periods of extreme fluctuations, however, governments and control banks may intervene to maintain stability in the market.

• Question 943:

  The capital asset pricing model (CAPM) computes the expected return on a security by adding the risk-free of return to the incremental yield of the expected market return, which is adjusted by the company's beta. Compute DQZ's expected rate or return.

  A. 9.20%

  B. 12.20%

  C. 7.20%

  D. 12.00%

  Correct Answer: A

• Question 944:

  Which of the following is the major difference between the capital asset pricing model (CAPM) and arbitrage pricing theory (APT)?

  A. CAPM uses discounted cash flows whereas APT does not.

  B. CAPM uses a single systematic risk factor to explain an asset's return whereas APT uses multiple systematic factors.

  C. APT uses a single systematic risk factor to explain an asset's return whereas CAPM uses multiple systematic factors.

  D. Under CAPM, the beta coefficient of the risk-free rate of return is assumed to be higher than that of any asset in the portfolio. Under APT, the beta coefficient of every asset in the portfolio is individual compared to the beta of the risk-free rate.

  Correct Answer: B

  CAPM uses a single systematic risk factor to explain an asset's return whereas APT uses multiple systematic factors.

• Question 945:

  An interest swap covers a 3-year period with annual payments on a $1 million notional principal amount. Party X agrees to pay a fixed rate of 8.5% to Party Z, who will in return pay to X a floating rate equal to the London Interbank Offered Rate (LIBOR) in effect. LIBOR is the rate offered by major London banks on large dollar deposites. The contract is initiated on January 1, Year 1. The first payment is due on December 21, Year

  1. The following are the floating rates on LIBOR over the 3-year period:

  Time LIBOR 1/1/Year 1 8.00% 1/1/Year 2 9.00% 1/1/Year 3 9.50% 1/1/Year 4 8.50%

  What is the net payment made to the party that recognized a net gain on the contract?

  A. $0

  B. $10,000 to X

  C. $ 15,000 to X

  D. $15, 000 to Z

  Correct Answer: B

  Party X owed $85,000 ($1,000,000 x .o85) for each of 3 years, a total of $255,00 ($85,000 x 3). Party Z

  owed $80,000 ($1,000,000 x .08) for Year 1,$90,000( $1,000,000 x .09) for Year 2, and $95,000

  ($1,000,000 x .095) for Year 3, a total of $265,000. Consequently, Party X received a net cash inflow of $

  10,000. DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to

  use the following combination of debt and equity to finance the investment.

  Issue $15 million of 20-year bonds at a price of $101, with a coupon rate of 8%, and flotation costs of 2%

  of par.

  Use $35 million of funds generated from earnings. The equity market is expected to earn 12% U.S.

  Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60.DQZ is

  subject to an affective corporate income tax rate of 40%.

• Question 946:

  A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. However, it is somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible decline in the stock's market price by

  A. Purchasing a call option on that stock

  B. Purchasing a put option on that stock

  C. Selling a put option on that stock

  D. Obtaining a warrant option on that stock.

  Correct Answer: B

  A put option is the right to sell stock at a given price within a certain period. If the market price falls, the put option may allow the sale of stock at a price above market, and the profit of the option holder will be the difference between the price stated in the put option and the market price, minus the cost of the option, commissions, and taxes. The company that issues the stock has nothing to do with put( and call) options

• Question 947:

  When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the assets, it is applying

  A. Working capital management

  B. Return maximization

  C. Financial leverage

  D. A hedging approach

  Correct Answer: D

  Maturity matching, or equalizing the life of an asset and the debt instrument used to finance that asset, is a hedging approach. The basic concept is that the company has the entire life of the asset to recover the amount invested before having to pay the lender.

• Question 948:

  A market analyst has estimated the equity beta of Modern Homes. Inc to be 1.4 This beta implies that the company's

  A. Systematic risk is lower than that of the market portfolio

  B. Systematic risk is higher than that of the, market portfolio

  C. Unsystematic risk is higher than that of the market portfolio.

  D. Total risk is higher than that of the market portfolio.

  Correct Answer: B

  Systematic risk, also called market risk and undiversifiable risk, is the risk of the stock market as a whole. Some conditions in the national economy affect all businesses, which is why equity prices so often move together. The effect of an individual security on the volatility of a portfolio is measured by its sensitivity to movements by the overall market. This sensitivity is stated in term of a stock's beta coefficient. An average-risk stock has a beta of 1.0 because its return are perfectly positively correlated with those on the market portfolio.

• Question 949:

  Within a financial risk management context, the term value at risk (VAR) is defined as the

  A. Maximum value a company can lose

  B. Maximum loss within a certain time period at a given level of confidence.

  C. Worst possible outcome given the distribution of outcomes.

  D. Most likely negative outcome.

  Correct Answer: B

  The value at risk (VAR) model uses statistical analysis of historical market and volatilities to estimate the likelihood that a given portfolio's losses will exceed a certain amount. It is preferable to sensitivity analysis because it states the probability (stated at a specific confidence level) that a given change in a variable

  ( e.g. a foreign currency exchange rate or an interest rate) will result in a given loss.

• Question 950:

  What is the formula for the beta coefficient of a security?

  A. Covariance of the returns on the market and on the security / Variance of the return on the market.

  B. Covariance of the returns on the market and on the security x Variance of the return on the market.

  C. Variance of the return on the market / Variance of the return on the security.

  D. Variance of the return on the market x Variance of the return on the security. / Covariance of the returns on the market and on the security

  Correct Answer: A

  The word beta is derived from the regression equation for regressing the return of an individual security (the dependent variable) to the overall market return. The beta coefficient is the slope of the regression line. The beta for a security may also be calculated by dividing the covariance of the return on the market and the return on the security by the variance of the return on the market.