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Exam style questions and answers

30 It is 4 July. A company needs to deposit £10 million for 9 months from
1 November and, to limit interest rate risk exposure, intends to hedge using
options on short term interest rate futures (STIRs). The notional sterling
deposit/loan for STIRs is £500,000.

Which of the following statements is/are true? (Select all that apply)

A The company will need 15 options contracts

B The company will need 20 options contracts

C The company will need 60 options contracts

D The company will need put options

E The company will need call options

31 The higher risk of a project can be incorporated into investment appraisal
by increasing:

Select all that apply.

A The cost of the initial investment of the project

B The estimates of future cash outflows from the project

C The internal rate of return of the project

D The required rate of return of the project

32 Q (a company) is considering an investment project that requires a $5 million
investment. The risk free rate is 5%, and the directors are 97% certain that cash
savings will be made in perpetuity.

Calculate the annual cash saving required for the project to break even.
(Answer in $, rounded to the nearest $)

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