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Format of the CIMA P3: Risk Management Exam
- Length of Examination: 90 minutes
- Language: English
- Number of questions: 60
- Format: Numerous choices, multiple responses
- Passing score: 70 percent
NEW QUESTION 95
Which method of quantifying risk exposure can be used to calculate the maximum loss on a portfolio occurring within a period of time with a given probability?
- A. Regression analysis
- B. Value at Risk
- C. Simulation
- D. Expected value
Answer: D
NEW QUESTION 96
Which of the following is an ethical dilemma?
- A. A company is deciding whether to issue debt or equity.
- B. A company must decide whether to settle a claim from an employee who appears to have fabricated a workplace injury. The company want to avoid the cost of defending the claim.
- C. A company is deciding whether to make a substantial bonus payment to its directors by means of cash or shares.
- D. A company is considering giving poorly-paid staff a generous pay rise.
Answer: D
NEW QUESTION 97
SDF has a variable rate loan of $100 million on which it is paying interest of LIBOR + 2%.
SDF entered into a swap with CV bank to convert this to a fixed rate 7% loan. CV bank charges an annual commission of 0.3% for making this arrangement.
Calculate the net payment from SDF to CV bank at the end of the first year if LIBOR was 3% throughout the year.
Give your answer in $ million, to one decimal place.
Answer:
Explanation:
$2.3 million
NEW QUESTION 98
JC is a car manufacturing company in country C and manufactures diesel cars It is facing a number of serious risks Which TWO of the following nsk factors are external?
- A. Country F, JC's main market, is threatening to impose tariffs on car imports
- B. JC is facing court action arising from injuries to customers caused by an alleged brake failure in one of its cars
- C. JC's production staff are complaining that their wages are too low compared to wages paid to other employees.
- D. JC's marketing director is considering an attractive job offer from one of J's main competitors
- E. Diesel cars are being criticised by experts because it is believed they cause more harmful pollution than petrol
Answer: A,E
NEW QUESTION 99
Passwords are frequently used to control access to computer systems.
Which of the following characteristics should a password have in order to make it effective?
- A. Passwords should be changed on a regular basis.
- B. Passwords should be written down in a secret place.
- C. Passwords should never be shared.
- D. Passwords should contain 20 characters or more.
- E. Passwords should be short words or names that users will easily remember.
- F. The strength of a password is increased by using upper and lower case and including numerals.
Answer: A,C,F
NEW QUESTION 100
GHJ makes large export sales to customers in Country A, whose currency fluctuates significantly against GHJ's home currency. GHJ also makes large purchases from suppliers in Country A.
All of these transactions are in Country A's currency.
GHJ's Treasurer does not actively hedge currency risks because there is a natural hedge in place due to the company making both sales and purchases in the same currency.
GHJ's Board has instructed the Treasurer to put active hedging measures in place because the Risk Report would otherwise have to disclose the fact that GHJ has a currency risk which is not actively hedged.
Which of the following statements are correct?
- A. The Board may be concerned it will be criticised if it does not hedge.
- B. Risk reporting drives the whole risk management process.
- C. The Board does not want to be blamed for ignoring a risk.
- D. Risk reporting is a bad thing.
- E. Risk reports can change behaviour.
Answer: A,C,E
NEW QUESTION 101
Select the correct ethical principle that corresponds to each ethical dilemma described.
Answer:
Explanation:
NEW QUESTION 102
Which of the following risks should be given highest priority?
- A. Risks which have a high impact and which may arise occasionally
- B. Risks which have a high impact and have a low likelihood of arising
- C. Risks which have a low impact but which arise frequently
- D. Risks which have a low impact and a low likelihood of arising
Answer: A
NEW QUESTION 103
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?
- A. A STIR is flexible and the position can be closed quickly and easily.
- B. A STIR must be kept for the whole duration of the contract.
- C. If interest rates have gone down the price of the future will have fallen.
- D. A STIR can be tailored to the exact needs of the company.
Answer: A
NEW QUESTION 104
QAW is a quoted building company QAW has detailed rules relating to the wording of its contracts and the need to seek Board approval for any changes to the standard wording The Convener of the Audit Committee has just received a copy of an internal audit report relating to the QAW Land Reclamation subsidiary The subsidiary has signed several construction contracts over the past two years that have made significant changes to the standard wording, with no attempt to seek approval from QAW's Board The internal audit report quotes the manager in charge of QAW Land Reclamation as refusing to accept that there is a compliance error at the subsidiary The manager stated that the nature of the business done by QAW Land Reclamation would make it inappropriate to use the standard contract terms and that it would be impractical to seek permission for every one of the many changes that are necessary Which of the following would be an appropriate response to this item by QAW's Board?
- A. The Audit Committee should seek an indication of the number of contracts with non-standard conditions are still in effect before deciding how to act.
- B. The Audit Committee should disregard the point because an explanation has been offered by the manager in charge of QAW Land Reclamation.
- C. The Audit Committee should treat this as an internal matter that should be dealt with by the management team of QAW's Land Reclamation.
- D. QAW's Director of Legal Affairs should investigate the matter and. if necessary, develop suitable standard contracts for QAW Land Reclamation.
Answer: A
NEW QUESTION 105
A project has an NPV of £1,200,000. The present value of material costs which are included in the NPV calculation are £8,000,000.
What is the sensitivity of the project to changes in material costs?
Give your answer to the nearest whole percentage.
Answer:
Explanation:
15%
NEW QUESTION 106
The interest rate on EUR deposits is 7%. The interest rate on GBP deposits is 5%. The spot rate is EUR/GBP0.8500. What is the one year forward rate predicted to be assuming interest rate parity holds true?
- A. 0.9633
- B. 0.7500
- C. 0.8662
- D. 0.8341
Answer: D
NEW QUESTION 107
Q is a company which generates electricity from alternative energy sources. It has just begun constructing a wind farm near a well-known beauty spot. The project has been controversial as campaigners say it will be noisy and unsightly.
The campaigners took legal action but lost the case. Some of them have started a campaign of direct action against Q and are physically blocking roads leading to the site and attempting to intimidate Q's staff.
Q has hired a security company to help it to protect its staff.
In relation to the ethics of this scenario, which of the following statements are valid?
- A. The generation of electricity from clean, renewable and sustainable sources is too important for the protestors' concerns to be considered.
- B. Q is within its rights to hire the security firm because it has duty of care to its employees.
- C. Q no longer has any duty of care to the protestors since their actions are illegal because they lost their court case.
- D. Since the protestors have already lost their court case they would no longer be ethically justified in engaging in political lobbying to try to get the government to change the law in this area.
- E. The security firm must take care not to use more force against the protestors than is absolutely necessary.
Answer: B,E
NEW QUESTION 108
A's directors do not believe that they always get value for money from their investment in capital projects.
Over the past decade the company has invested in 55 projects that have cost more than $1m. They are considering introducing a system of post completion audit to see if this will help them to understand any problems they have had with projects in the past. They hope to use the results of the post completion audits to significantly improve the results of their capital investments State whether you agree or disagree with the points raised by A's directors.
Answer:
Explanation:
NEW QUESTION 109
D plc is a public relations company. Shares in D plc have recently been listed on the UK stock exchange.
D plc has an internal audit department that reports to the Chief Executive Officer (CEO). The CEO is considering outsourcing internal audit to an audit firm, which would not be the firm that conducts D plc's external audit.
Identify THREE advantages to D plc of outsourcing internal audit in this way.
- A. Specialist skills may be more readily available.
- B. Risk of staff turnover is passed to the outsource company.
- C. Doing so may improve independence.
- D. Internal audit will have a better understanding of D plc's objectives and culture.
- E. Decisions relating to internal audit can be based solely on cost.
Answer: A,B,C
NEW QUESTION 110
VBN is a multinational company that has 60 subsidiary companies that operate in 11 countries. VBN evaluates the performance of each subsidiary as an investment centre, using residual income to measure performance.
Which THREE of the following threats of dysfunctional behaviour may arise from VBN's use of residual income to measure subsidiaries' performance?
- A. Subsidiary boards may actively hedge translation risks.
- B. Subsidiary boards may waste time by arguing over transfer prices.
- C. Subsidiary boards may waste time and incur unnecessary fees in order to recognise gains on the revaluation of property.
- D. Subsidiary boards may take a short-term view to investment projects.
- E. Subsidiary boards may be motivated to spend heavily on capital expenditure in order to ensure that budget allocations are maintained and even increased.
Answer: A,B,D
NEW QUESTION 111
P has decided to invest in a new warehouse at a cost of $2,000,000. The discount rate of the project is 18% and the present value of the tax shield is £26,000.
What is the minimum acceptable Internal Rate of Return of the project?
- A. 16.50%
- B. 17.77%
- C. 18%
- D. 18.23%
Answer: B
NEW QUESTION 112
Y plc, a pharmaceutical company, has dealt with a number of risks in the manner indicated below.
Use the TARA framework to classify each of Y plc's responses.
Answer:
Explanation:
NEW QUESTION 113
R plc is considering an investment of $1,100,000 in a new machine which is expected to have substantial cash inflows over the next five years.
The annual cash flows from this investment and their probability are shown below:
Annual cash flow ($) Probability
200,000 0.4
280,000 0.5
350,000 0.1
At the end of its five-year life, the asset is expected to sell for $100,000. The cost of capital is 5%.
What is the Expected Net Present Value?
Give your answer to the nearest whole $.
Answer:
Explanation:
$82295, $82550
NEW QUESTION 114
THG is a quoted company that manufactures expensive clothes that are sold to upmarket department stores THG's Board has commissioned a stress test to identify the impact of strategic risks The consultant who is conducting the test is currently investigating the impact that a 1 % increase in interest rates would have on THG.
Which TWO of the following are valid reasons for including an increase in interest rates in the stress test?
- A. THG is highly geared.
- B. Many of the retailers who resell THG's clothes are highly geared
- C. Interest rates affect consumers' disposable income
- D. Stress testing was first developed for bank supervision.
- E. THG might change its prices if interest rates rise
Answer: A,C
NEW QUESTION 115
B uses a balanced scorecard to monitor the performance of its divisions.
Classify each of the following decisions taken by a division's management team as either commercially sound or dysfunctional.
Answer:
Explanation:
NEW QUESTION 116
TDC is a company which runs gas-fired power stations in western Europe. The Risk Committee has just received a report that a power station built to the same design and specification in a developing country has recently collapsed. The causes of the collapse are unclear but the consequences for TDC would be catastrophic if something similar were to happen in Europe Which of the following actions being considered by the Risk Committee are ethical?
Select ALL that apply
- A. Commission a reputable firm of structural engineers to carry out a review of all power stations owned by TDC
- B. Issue a press release confirming that all TDC's power stations are "entirely safe'.
- C. Send experts employed by TDC to the site of the collapse so that they can gather information first hand on what happened
- D. Decide that the information available to date is too uncertain to take any action for now
- E. Attempt to increase the level of insurance cover against this type of eventuality
- F. Draw up contingency plans in case some of TDC's power stations need to be shut down
Answer: A,C,F
NEW QUESTION 117
TT is a jewellery manufacturer in country A It makes jewellery from precious metals and stones and sells it to shops in country A and also overseas It is the 3rd largest company in country A with a huge turnover TT has found it very difficult to prevent staff committing fraud and last year the Board was sure that the year end inventory was lower than it should have been Gross profit was also slightly lower than expected Which TWO of the following internal controls would be most effective in helping to reduce staff fraud within TT?
- A. Install-several CCTV cameras in the workshop
- B. Employ two more managers to watch the staff working and look for them stealing items
- C. Carry out inventory checks daily to make sure the correct quantity of materials is being used every day and the correct number of items are being produced
- D. Have a senior manager such as the Production Director to supervise the workshop at all times
- E. Perform random checks of staff bags as they leave work and ensure the staff all wear overalls provided by the company in the workshop Their own clothes must be left in lockers during working hours
Answer: A,E
NEW QUESTION 118
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