IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 931:

  Suppose exchange rates, prior to the introduction of the euro, between U.S. dollars and Swiss francs is SF

  1.62 = $ 1.00 and the exchange rate between the U.S. dollar and the German mark is $1.00 = 1.50 DM. What is the cross-rate of Swiss francs to German marks?

  A. 2.62

  B. 1.08

  C. 1.62

  D. 0.93

  Correct Answer: B

  Since the dollar is the same in both ratios, the cross-rate between francs and marks is determined by dividing the 1.62 francs by 1.50 marks, resulting in 1.08 francs per mark.

• Question 932:

  Prior to the introduction of the euro, if one Swiss franc can purchase $0.42 U.S. dollars, how many Swiss francs can $1 U.S. buy?

  A. 2.38

  B. 1.00

  C. 0.58

  D. 24

  Correct Answer: A

  Given the value of a franc, the value of $1 will simply be the inverse. Thus, $1 / .42 = 2.38 francs per dollar.

• Question 933:

  Multinational financial management requires that

  A. Legal differences be excluded from financial decisions.

  B. Political risk be ignored from multinational corporate financial analyses because it cannot be quantified by management.

  C. The effect of changing currency values be included in financial analyses.

  D. Firms diversity into at least 20 countries to receive a sufficient diversification benefit.

  Correct Answer: C

  Multinational financial management requires analysis of legal and political risks, as well as the effect of changing currency values.

• Question 934:

  Contracts to hedge risk by exchange cash flows include

  Interest-Rate Currency Swaps Swaps

  A. Yes Yes

  B. Yes No

  C. No Yes

  D. No No

  Correct Answer: A

  Swaps are contracts to hedge risk by exchanging cash flows. In an interest-rate swap, one firm exchanges its fixed interest and principal payments for a series of payments based on a floating rate. If a firm has debt with fixed charges, but its revenues fluctuate with interest rates, it may prefer to swap for cash outflows based on a floating rate. The advantage is that revenues and the amounts of debt service will then move in the same direction, and interest-rate risk will be reduced. A currency swap is an exchange of an obligation to pay out cash flows denominated in one currency for an obligation to pay in another. For example, a U.S. firm with revenues in francs has to pay suppliers and workers in dollars, not francs. To minimize exchange-rate risk, it might agree to exchange francs for dollars held by a firm needs francs. The exchange rate will be an average of the rates expected over the life of the agreement.

• Question 935:

  Duration hedging involves hedging interest-rate risk by matching the duration of assets with the duration of liabilities. Which of the following is a true statement about duration hedging?

  A. If duration increases, the volatility of the price of a debt instrument decreases.

  B. The goal of duration hedging is to equate the duration of assets with the duration of liabilities.

  C. The firm is immunized against interest-rate risk when the total price change for assets equals the total price change for liabilities.

  D. Duration is higher if the nominal rate on a debt instrument is higher.

  Correct Answer: C

  The goal of duration hedging is not to equate the duration of assets and the duration of liabilities but for the following relationship to apply. (value of assets) x (Duration of assets) = ( value of liabilities) x ( Duration of liabilities) The firm is immunized against interest-rate risk when the total price change for assets equals the total price change for liabilities.

• Question 936:

  If Vp is the value of a put option, Vc is the value of a call option, Vs is the value of the stock, and Pve is the present value of the exercise price, what is the formula for the put- call theorem for European options?

  A. Vs = Pve – Vp -Vc

  B. Vs + Vp – Vc = Pve

  C. Vs / Pve = Vp / Vc

  D. Pve = Vs – Vp - vc

  Correct Answer: B

  For European option, given market equilibrium for all relevant prices ( no arbitrage possibilities) , equal exercise prices for the put and the call, and the same expiration date, the put-call parity theorem states that a fixed relation applies to the market values of the put and call options on a security. For example, a strategy of selling one call option, buying one share of the stock, and buying one put option should result in a risk-free return. The gain (loss) from the stock and the put should equal gain (loss) on the call. If Vs is the value of the stock, Vp is the value of the put, Vc is the value of the call, and Pve is the present value of the exercise price (the time interval is the time to expiration), the formula for put-call parity may be stated as follows: Vs + Vp ?Vc = Pve

• Question 937:

  The most widely used currency in international business today is the

  A. United States dollar

  B. Euro

  C. Japanese yen

  D. Swiss franc

  Correct Answer: A

  The U.S. dollar is the most widely used currency in international markets today. It is considered much more stable than any of the third-world currencies. Thus, many third- world countries rely on the U.S. dollar for foreign trade.

• Question 938:

  Which method for measuring risk considers both the sensitivity of changing NPVs and the range of values of the variables that are changed?

  A. Simulation analysis

  B. The capital Asset Pricing Model

  C. Sensitivity analysis

  D. Certainty equivalent adjustments.

  Correct Answer: A

  Simulation analysis considers both the sensitivity of the VPV when variables are changed and the range of values of the variables that are changed.

• Question 939:

  Consider aworld consisting of only two countries and prior to the introduction of the euro, Canada and Italy. Inflation in Canada in 1 years was 5%, and in Italy 10%. Which one of the following statements about the Canada exchange rate (rounded) during that year will be true?

  A. Inflation has no effect on the exchange rates.

  B. The Canada dollar will appreciate by 5%.

  C. The Canada dollar will depreciate by 5%.

  D. The Canada dollar will depreciate by 15%.

  Correct Answer: B

  Because Italy has experienced the greater inflation, its currency should depreciate in relation to Canada's. For example, if Canada trades 100 units of a product to Italy for pre- inflation price of $100 ( the domestic price in Canada), and Italy pays with 10,000 units of an Italian product that sells domestically for 10,000 pre-inflation lira, the exchange rate without regard to inflation is 100 lira per $1 (10,000 lira / $100). Allowing for the inflation, the 100 units of the Canadian product would sell for $105. The 10,000 units of the Italian product would sell for 11,000 lira. Thus, the new exchange rate will be 104.76 lira per $1 (11,000 lira / $105), and the price of the Canadian dollar will increase by 4.76% (rounded to 5%)

• Question 940:

  The U.S. dollar has a free-floating exchange rate. If the dollar falls considerably in relation to other currencies over the next 2 years, the

  A. Capital account in the U.S. balance of payments will be neither in a deficit nor in a surplus because of the floating exchange rates.

  B. Fall in the dollar's value will not be expected to have any effect on the U.S. trade balance.

  C. Cheaper dollar will help U.S. importers of foreign goods.

  D. Cheaper dollar will help U.S. importers of domestically produces goods.

  Correct Answer: D

  The decline in the value of the dollar relative to other currencies will lower the price of U.S. goods to foreign consumers. Thus, exporters of domestically produced goods will benefit. The low value of the dollar will decrease imports by making foreign more expensive.