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Hba2303:Financial Accounting Question Paper
Hba2303:Financial Accounting
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2013
QUESTION ONE
(a) Define the term risk. (2Marks)
(b) List and briefly explain 3 advantages of financial risk management. (3Marks)
(c) Explain the main phases of Financial Risk Management. (10Marks)
(d) The following are the details of the investment in projects that a company is considering.
Project ‘000’
Initial Outlay
Return over two years
Expected Standard Deviation
Project 1 4,000 25% 90%
Project 2 6,000 34% 13%
Project 3 6,000 28% 15%
Project 4 4,000 18% 5%
2
The correlation coefficient of returns over the two years are as follows:-
P1 P2 0.57
P1P3 0.62
P1P4 0.4
P3P4 0.55
Over the last 2 years, the risk free rate is estimated to be 16%, the market portfolio return is 27% and the variance of the return on the market portfolio is 100%.
An investor is interested in only two portfolios as follows:-
P1 P2 0.57
P3P4 0.55
Required:
(a) Calculate the absolute risk of the two portfolios. (8Marks)
(b) Calculate the relative risk of the two portfolios. (5Marks)
(c) Advice the investor which portfolio he should accept. (2Marks)
QUESTION TWO
(a) Explain the following terms as used in the Forex market.
(i) Exchange rate (2Marks)
(ii) The spread (2Marks)
(iii)Direct Quote (2Marks)
(iv) Indirect Quote (2Marks)
(v) Cross rate (2Marks)
(b) List and briefly explain factors that affect exchange rates. (4Marks)
(c) Explain three main exchange rate exposure. (6Marks)
3
QUESTION THREE (a) On 1st March, 2011 a Kenyan Importer purchased goods from USA worth US Dollars 120,000 to be paid for two months later on 30th April, 2011. Kenya Shillings futures available in the money market and could be bought in blocks of Kshs. 100,000 and each future contract cost Kshs. 1,000. Spot rate on 1st March, 2011 was Kshs. 76.5 = 1US Dollar. The two months forward exchange rate on 30th April, 2011 was Kshs. 79.5 = 1 US Dollar and the exchange rate at which the futures were closed out was Kshs. 77.50 = 1 US Dollar.
Required:
(a) The net loss/gain of using future contracts. (16Marks)
(b) Determine the number of future contracts. (4Marks)
QUESTION FOUR
(a) Assume that a foreign currency (F) has been quoted against Sterling Pound as follows:
Spot rate £1: F 2156 – 2166
3 Months forward rate £1: F 2207 – 2222
Required
(i) Determine the amount required in Sterling Pound to buy 2 million foreign currencies.
? At spot rate
? In 3 months time forward exchange contract. (5Marks)
(ii) Calculate the amount the customer would get if he were to sell two million foreign currency.
? At the spot rate
? In 3 months time under forward exchange contract. (5Marks)
4
(b) Explain five practical application of option theory. (10Marks)
QUESTION FIVE
(a) Define the term structure of interest rates. (2Marks)
(b) What is a yield curve? (2Marks)
(c) With an aid of diagrams, show four different possible yield curves. (4Marks)
(d) Discuss the theories of the term structure of interest rates. (12Marks)
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