Examination Paper,

Solutions and Examiners

Report


Paper:
Certificate in International Treasury
Management



April 2014

ITM 1



1 Where subsidiaries always initiate deals with local banks, head office treasury is most
likely to be adopting:

(a) an agency role
(b) an advisory role
(c) an in-house banking role
(d) a cost centre approach
(e) a profit centre approach


2 The objective of Segregation of Duties is that no employee should be in a position to both:

(a) commit and conceal fraud or error in the usual course of their duties
(b) initiate and authorise a payment
(c) perform front and back office duties
(d) perform accounting and any other back office function


3 When calculating interest earned on a USD money market deposit, how many calendar
days are there between 10 January 2014 and 18 June 2014?

(a) 190
(b) 189
(c) 188
(d) 160
(e) 159
(f) 158


4 The best estimate of the equivalent EAR for a 3% 60 day USD deposit is:

(a) 2.996%
(b) 3.000%
(c) 3.038%
(d) 3.042%
(e) 3.081%


ITM 2

5 An instrument with a face value of EUR 100,000 is issued at a 4% discount for 50 days.
The best estimate of the price an investor would pay for the instrument on the issue date
is:

(a) 99,444
(b) 99,448
(c) 100,000
(d) 100,556
(e) 100,559


6 A 60 day USD instrument is issued at a 4% nominal discount. The best estimate of the
equivalent EAR is:

(a) 4.153%
(b) 4.125%
(c) 4.097%
(d) 4.014%
(e) 4.000%
(f) 3.987%


7 Yield 4% 5% 6% 7% 8%
AF (8 years) 6.7327 6.4632 6.2098 5.9713 5.7466
DF (8 years) 0.7307 0.6768 0.6274 0.5820 0.5403

A 6% annual coupon bond has 8 years until redemption at par. If it is trading at 106.5, the
best estimate of the yield to maturity is:

(a) 4%
(b) 5%
(c) 6%
(d) 7%
(e) 8%


8 A series of annual cash flows is expected to start in 8 years time with a payment of 100,
growing thereafter at 3% per annum. At a discount rate of 8%, the cash flows have a
present value of:

(a) 1,000
(b) 1,081
(c) 1,113
(d) 1,167
(e) 1,202
(f) 2,000


ITM 3

9 A single zero coupon yield curve shows market interest rates for instruments with the
same:

Maturity Currency Credit risk

(a) yes yes yes
(b) yes yes no
(c) yes no no
(d) no yes yes
(e) no yes no
(f) no no yes


10 Zero, forward and par yield curves are shown below:











The par yield curve is most likely to be:

(a) A
(b) B
(c) C


11 A Treasurer plans to issue a 2 year semi-annual par bond. Market rates for bonds with the
same credit rating are:

6 months 12 months 18 months 24 months
Semi annual zero coupon rates 2.00% 2.30% 2.50% 2.70%
Discount factors 0.99010 0.97739 0.96342 0.94777
Cumulative discount factors 0.99010 1.96749 2.93091 3.87868

The best estimate of the quoted yield for this 2 year par bond issue is:

(a) 2.70%
(b) 2.69%
(c) 2.38%
(d) 1.35%


Term to maturity
C
B
A
%
ITM 4

12 Today, a Malaysian company pays a Canadian supplier CAD 1 million. If CAD/MYR spot
is 2.9580 16, the best estimate of the MYR cost is:

(a) 2,961,600
(b) 2,958,000
(c) 2,951,600
(d) 338,799
(e) 338,066
(f) 337,655


13 Today, a Mexican company pays a Swedish supplier SEK 1 million. Spot rates are:

USD/MXN: 12.0490 - 06
USD/SEK: 6.5350 - 60

The best estimate of the MXN cost is:

(a) 1,844,000
(b) 1,843,482
(c) 1,842,197
(d) 542,830
(e) 542,452
(f) 542,380


14 On Wednesday 26 June the 4 month forward date on a EUR/USD deal is:

(a) Friday 25 October
(b) Monday 28 October
(c) Tuesday 29 October
(d) Wednesday 30 October
(e) Thursday 31 October
(f) Friday 1 November


ITM 5

15 In 3 months time, a US company will pay MYR 1 million to a Malaysian supplier. Today,
the US company enters into a forward contract to hedge this transaction. Market rates are,
today:

Spot rate 1 month 3 month 6 month
USD/MYR: 2.9650 - 80 60 - 56 150 - 143 210 - 195

The best estimate of the hedged USD cost in 3 months time is:

(a) 2,980,000
(b) 2,953,700
(c) 2,950,000
(d) 338,983
(e) 338,558
(f) 335,570


16 A Mexican company is due to receive SEK 1 million in 6 months. It hedges this receipt
with a forward contract when market rates are:

Spot rate 1 month 3 month 6 month
USD/MXN: 12.9650 - 80 60 - 56 150 - 143 210 - 195
USD/SEK: 6.5350 - 60 10 - 12 20 - 25 40 - 48

The SEK are received in 6 months and the forward contract closed out. The best estimate
of the MXN side of the hedged transaction is:

(a) 1,980,000
(b) 1,979,000
(c) 505,000
(d) 503,000


17 Market rates are:

Spot rate 1 month 3 month 6 month
USD/MYR: 2.9650 - 80 60 - 56 150 - 143 210 - 195

A small Malaysian company is expecting to receive USD 50,000 sometime between
one month and six months time. The best estimate of the USD/MYR rate the bank would
offer the company for a hedging contract deliverable on any date between these two dates,
at the option of the company, is:

(a) 2.9624
(b) 2.9590
(c) 2.9485
(d) 2.9440


ITM 6

18 USD/MYR spot is 2.9650. Market interest rates are:

6 month (180 days) Day count basis
USD Libor 1.12500%
KLIBOR (on MYR) 3.25000% act/365

The best estimate of the implied USD/MYR 180 day forward rate is:

(a) 3.0273
(b) 2.9957
(c) 2.9346
(d) 2.9040


19 ABC Inc wishes to borrow USD 1 million for 120 days. ABC Inc can borrow in USD directly
at 3.1% or in GBP at 3.0%. GBP/USD spot is 1.5500 and 120 day forward pips are
+0.0010. Assuming a fully hedged basis, ABC Inc:

Should borrow in: Because this is cheaper by USD:

(a) USD 4,963
(b) USD 1,121
(c) USD 181
(d) GBP 4,963
(e) GBP 1,121
(f) GBP 181



20 An investor uses their home PC to trade shares, based on only:
- real time past and current share price information and trends
- market reports
- public chat rooms

The investor has made a profit greater than expected under CAPM given the systematic
risk taken, for each of the past five years (you may assume CAPM is true). Assuming the
investor has not just been lucky, which version or versions of the Efficient Market
Hypothesis is this evidence consistent with?

Semi strong form: Strong form:

(a)
consistent consistent
(b)
consistent not consistent
(c)
not consistent consistent
(d)
not consistent not consistent
ITM 7

21
Assume no tax and that Modigliani and Millers theory without tax holds. A company has:

- a cost of equity of 8%
- a WACC of 7.2%
- gearing (debt/equity) of 20%

If gearing is changed to 40%, the new cost of equity will be:

(a) 7.2%
(b) 8.0%
(c) 8.8%
(d) 11.9%


22
At high levels of gearing when taxes, financial distress, agency cost, financial slack and tax
capacity are taken into account, a further increase in gearing would most likely lead to:

WACC Cost of debt Entity value
(a)
increasing increasing increasing
(b)
increasing increasing decreasing
(c)
decreasing staying the same increasing
(d)
decreasing staying the same decreasing


23
A company has:

- a WACC of 12%
- a cost of debt of 4%
- a debt:equity ratio of 1:3

A proposed project has the same risk profile as the company and a positive NPV at a
discount rate of 12%. This NPV is most likely to:

(a) be shared between debt and equity providers in the 1:3 ratio
(b) flow to equity providers because it is part of their required return
(c) flow to equity providers because debt providers are only entitled to a contractual return
(d) be shared equally between debt and equity providers


ITM 8

24











If CAPM is true, then this graph indicates that:

X is: Y is:
(a)
under-priced under-priced
(b)
under-priced over-priced
(c)
over-priced under-priced
(d)
over-priced over-priced


25
A company:

- is all equity financed
- has a cost of equity of 14%
- pays 60% of its earnings as dividends
- generates a return of 10% on reinvested funds

A dividend of 300,000 has just been paid.
The best estimate of the market value of the company using the Gordon Growth model is:

(a) 2,229,000
(b) 3,000,000
(c) 3,120,000
(d) 3,975,000


26
Modigliani and Millers dividend irrelevance theory assumes:

(a) shareholders prefer steady growth in dividends year on year
(b) companies can issue new equity shares at zero transaction cost
(c) capital gains is generally taxed at a lower rate than dividend income
(d) shareholders always prefer dividends to earnings being retained in the company


1 Beta
Return
Security Market Line
Rm
Rf
X

Y
ITM 9

27 A company is considering a core business project with the following cash flows:


Up-front investment in machinery 5,000
Net post tax cash inflows at the end of: Year 1 2,000
Year 2 3,200
Year 3 4,000

The company has a pre-tax WACC of 13% and a post-tax WACC of 12%, but the project is
to be wholly financed with debt with a pre-tax cost of 7% and a posttax cost of 5%. The
best estimate of the projects net present value is:

(a) 2,048
(b) 2,184
(c) 2,929
(d) 3,262


28
NPV is theoretically superior to IRR because only NPV:

(a) assumes that cash generated by a project is reinvested at the projects rate of return
(b) quantifies the impact of a project on shareholders wealth
(c) avoids the need to calculate an appropriate discount rate
(d) is a measure of risk


29
A proposed project:
- is to be valued at a discount rate of 8%
- requires investment of 25,000 now
- will generate equal annual cash flows of 5,000 from time 4 in perpetuity

The best estimate of the NPV of the project is:

(a) 20,939
(b) 24,615
(c) 29,769
(d) 37,500


ITM 10

30
Which of the following are relevant cash flows when calculating a project NPV discounted
at an appropriate WACC?

Project marketing costs
already paid for
Costs of employing a
project supervisor
Interest on borrowings used
to fund the project

(a)
yes yes yes
(b)
yes yes no
(c)
yes no yes
(d)
no yes yes
(e)
no yes no


31
A project has the following NPV at different discount rates:

Discount rate 8% 9% 10%
NPV, $ 30 -10 -56

The best estimate of the projects IRR is:

(a) 8.00%
(b) 8.25%
(c) 8.50%
(d) 8.75%
(e) 9.00%
(f) 9.25%


32
A company has:

- forecast free cash flow after interest and tax of 200,000 starting at the end of
year 4, and growing thereafter at 3% per annum in perpetuity
- a cost of equity of 12%
- a WACC of 10%

The best estimate of the companys terminal value is:

(a) 1,412,000
(b) 1,582,000
(c) 1,951,000
(d) 2,147,000


ITM 11

33
The entity value (debt plus equity) of a company is found directly using:

Discount Rate Cash flows

(a)
WACC Before financing costs
(b)
WACC After financing costs
(c)
Ke Before financing costs
(d)
Ke After financing costs


34
Company X Company Y
$ million $ million
Earnings 100 50
P/E 18 14
Valuation 1,800 700

If X acquires Y, it is estimated that there would be synergistic savings of $10 million per
annum. The P/E ratio of the combined entity is estimated at 17. The best estimate of the
maximum price that X would pay for Y is:

(a) $580 million
(b) $710 million
(c) $840 million
(d) $850 million
(e) $920 million
(f) $1,020 million


35
On 31 March 2014, a company pays rent of 10,000 in advance, for the period 1 April to
1 October 2014. In its statement of financial position as at 31 March 2014 this will be
shown under:

(a) current liabilities
(b) non-current liabilities
(c) intangible assets
(d) other receivables


ITM 12

36
million
Operating profit 145
Net profit 100
Debt 160
Equity 570
Cash and cash equivalents 40

The best estimate of the ROCE using net debt is:

(a) 13.0%
(b) 13.7%
(c) 14.5%
(d) 18.8%
(e) 19.9%
(f) 21.0%


37
million
Inventory 25
Trade and other receivables 40
Overdraft 10
Trade and other payables 30

The best estimate of the quick ratio is:

(a) 0.38
(b) 1.00
(c) 1.33
(d) 1.63
(e) 1.67


38
A company has a floating rate borrowing and enters into a swap agreement to fix the
interest payments on this borrowing. Under IAS 39 this would be classified as a:

(a) cash flow hedge
(b) fair value hedge
(c) commodity hedge
(d) net investment hedge


ITM 13

39
Company AA is due to pay 10 million of interest to a foreign bank, and is required to
withhold tax at 15%. If a grossing up clause exists within the borrowing agreement, what
is the best estimate of the withholding tax the company will pay to the UK tax authorities?

(a) 1.76 million
(b) 1.50 million
(c) 1.30 million
(d) nothing, due to the grossing up clause


40 An investor can invest 100 in either the ordinary shares or the bonds of a company. Over
the long term the investor would expect the value of the dividends:

(a) to equal the total value of the interest paid on the bonds
(b) to equal the share value appreciation
(c) plus the share value appreciation to exceed the total value of the interest paid on the
bonds
(d) plus the share value appreciation to equal the total value of the interest paid on the
bonds


41 A major benefit to a private company choosing to list its shares on a public market is:

(a) to access the long term view of company prospects typical of public markets
(b) to access a new source of funding
(c) to give the companys management more operating freedom
(d) to decrease administration costs
(e) to enable the existing owners to buy more shares


42 All collective investment vehicles:

(a) only invest in community-owned projects for the benefit of the community
(b) accept funds from others and invest those funds on their behalf
(c) specialise in very low value corporate investments
(d) acquire funds internationally


43 An investor relations managers main role is to:

(a) arrange and manage new share issues
(b) organise and run the Annual General Meeting
(c) ensure the company acts in the best interests of its shareholders
(d) provide information on the company to investors and analysts


ITM 14

44 In preparing for a new equity issue, the Treasurer should, as far as possible, keep their
companys lending banks informed of how the funds will be used. The best reason for this
is because these banks:

(a) may wish to buy shares
(b) have the right of veto over the equity issue
(c) may change their view on the companys credit worthiness
(d) will underwrite the issue


45 A company has 10 million shares in issue and a share price of 8.00. If the company
raises 21 million using a rights issue at a 25% discount then the best estimate of:

Number of new
shares issued is:
Theoretical ex-rights
share price is:


(a) 3.8 million 7.32
(b) 3.5 million 7.48
(c) 3.5 million 6.00
(d) 2.6 million 6.00


46 A company based in the USA has net assets in Japan of JPY 8,000 million and income
each year of JPY 200 million. The company could reduce its currency risk exposure by:

(a) borrowing in JPY
(b) borrowing in USD
(c) investing in JPY
(d) investing in USD


47 A debt security of a UK based company is listed on the Luxembourg exchange. This is
most likely to happen because:

(a) the debt security market in Luxembourg is highly liquid
(b) there is an EU subsidy for listing in Luxembourg
(c) Luxembourg exchange listing requirements are less onerous than listing in the UK
(d) tax can be withheld on interest paid


ITM 15

48 On 1 January 20X0, a bank lends a company $80 million for 3 years, secured on a floating
charge over the inventory of the business which has a value of $100 million at that point.

On 1 January 20X2, the company goes into liquidation when it has the following realisable
values:

Inventory $120 million
Cash $20 million
Trade payables $200 million
Bank loan $80 million (including all interest to that date)

The bank is likely to recover:

(a) $nil
(b) $40 million
(c) $80 million
(d) $100 million
(e) $120 million


49 A 10 year, 5% annual coupon bond, has 5 years left to maturity, when it is redeemable at
par. If the current market yield for a bond of this risk is 6%, the best estimate of the bonds
market value is:

(a) 95.79
(b) 100.00
(c) 103.73
(d) 111.53


50 A UK based company intends to issue a USD denominated bond in London. This is known
as a:

(a) foreign bond
(b) Yankee bond
(c) Bulldog bond
(d) Eurobond


51 A 10 year zero coupon bond is issued at a price of 70 and will be redeemed at face value.
The best estimate of the yield to maturity of the bond at issue is:

(a) 2.7%
(b) 3.0%
(c) 3.6%
(d) 4.3%


ITM 16

52 Most of the time, the clean price of a bond is:

(a) less than the dirty price
(b) more than the dirty price
(c) the same as the dirty price
(d) unrelated to the dirty price


53 A money market line is normally regarded as:

(a) an uncommitted facility because there is no guarantee the borrower will be able to
access the money market for borrowings when it wants
(b) an uncommitted facility because monies borrowed are repayable on demand
(c) a committed facility because a money market investor cannot demand repayment
before maturity
(d) a committed facility because interest on the borrowing is paid at maturity


54 A pricing ratchet might be triggered by:

An improvement in the
companys credit rating
A deterioration in specified
financial ratios

(a) yes yes
(b) yes no
(c) no yes
(d) no no


55 A company has arranged a 5 year borrowing facility of $120 million with an upfront fee of
0.4% of the facility, payable immediately. The companys marginal cost of borrowing is
6.0%. The best estimate of the $ annual equivalent cost of the upfront fees is:

(a) 95,000
(b) 96,000
(c) 102,000
(d) 114,000


ITM 17

56 A companys borrowings are subject to covenants based on tangible net worth and current
ratios. If this company purchases a patent for $200,000 using its overdraft facility, the most
likely effect on these ratios is:

Tangible net worth Current ratio

(a) no impact no impact
(b) no impact worsen
(c) worsen no impact
(d) worsen worsen


57 A credit rating of BBB- on a corporate bond issue means:

The bond is
investment grade
The bond is likely to be riskier
than a Ba2 bond

(a) yes yes
(b) yes no
(c) no yes
(d) no no


58 Thin capitalisation rules often state a maximum debt level of X% of equity. This means:

(a) a company cannot issue debt in excess of this maximum
(b) interest on all debt is not tax deductible if this maximum is exceeded
(c) interest on debt above this maximum is not tax deductible
(d) withholding tax must be deducted from interest on debt above this maximum


59 A 20 year sale and leaseback arrangement over a companys head office will normally
produce, in the first year of the lease:

A cash inflow An accounting loss

(a) yes yes
(b) yes no
(c) no yes
(d) no no


60 A money market deposit is always
a source of liquid funds
All else being equal, reducing inventory
levels will increase cash

(a) yes yes
(b) yes no
(c) no yes
(d) no no


ITM 18

61 A business starts on 1 January with cash of 20 and forecasts the following results:

January February March
Sales 10 20 40
Purchases 6 12 24

Customers are allowed two months to pay, and suppliers are paid after one month. The
best estimate of the cash balance on 1 April is:

(a) (12)
(b) (8)
(c) 8
(d) 12
(e) 32
(f) 48


62 The following information is available about plant and equipment for a period:

Opening net book value 120
Closing net book value 135
Depreciation charged 15
Disposal proceeds 25
Profit on disposal 8

The best estimate of the expenditure on plant and equipment in the period is:

(a) 13
(b) 17
(c) 22
(d) 47
(e) 63


63 A typical manufacturing companys operating cycle will lengthen if it:

(a) improves its receivables collection processes
(b) reduces its inventory levels
(c) pays its suppliers more quickly
(d) transfers cash to a fixed term deposit


ITM 19

64 Company ABC maintains an overdraft on which it pays 5% (act/365). ABCs average
payables are HKD 6 million. If ABCs average Days Payable Outstanding increase from 40
to 60 days, the best estimate of the impact on ABCs annual profit before tax is (in HKD):

(a) 16,500
(b) 100,000
(c) 150,000
(d) 160,000
(e) 200,000
(f) 450,000


65 A company ABC buys goods from XYZ. ABC would have consignment inventory if the
inventory is:

Held: Bought and paid for:
(a) on ABCs premises on delivery to ABC
(b) on ABCs premises when used or re-sold by ABC
(c) on XYZs premises on delivery to ABC
(d) on XYZs premises when used or re-sold by ABC


66 When arranging new short term borrowings, the most important attribute to consider is:

(a) security
(b) flexibility
(c) availability
(d) diversification


67 A 30 day $10 million commercial bill of exchange payable to supplier Y is issued by
company X. The bill is accepted by Xs bank Z, and sent to supplier Y. At maturity:

If X has $10 million: If X is unable to pay:

(a) X pays Y Y is not paid
(b) X pays Y Z pays Y
(c) Z pays Y Y is not paid
(d) Z pays Y Z pays Y


ITM 20

68 A $3 million CD with a coupon of 4% is issued for 200 days. 50 days later, an investor
buys the CD when it has a yield of 5.2%. The investor holds the CD for 80 days, and then
sells the CD at a market yield of 4.8%. The best estimate of the $ sale proceeds is:

(a) 2,972,000
(b) 3,030,000
(c) 3,035,000
(d) 3,038,000
(e) 3,058,000
(f) 3,065,000


69 A company:
- has a marginal tax rate of 30%
- borrows USD 20 million for 8 years at USD Libor plus 150bp
- deposits USD 9 million at USD Libor minus 80bp for 30 days

The best estimate of the USD cost of carry after tax is:

(a) 3,675
(b) 4,492
(c) 12,075
(d) 14,758
(e) 17,250


70 ECP with a face value of $6.0 million is issued for 90 days at $5.8 million. 40 days later,
an investor pays $5.9 million to purchase the ECP. If held to maturity, the investors
holding period yield would be:

(a) 12.0%
(b) 12.2%
(c) 13.8%
(d) 15.3%


ITM 21

71 On 31 July a companys bank account has a cleared credit balance of GBP 5,000.
Subsequent bank reports for the account show:

Ledger date Value Date GBP
31 July 2 August 6,000 debit
3 August 3 August 4,000 credit
17 August 19 August 7,000 debit
25 August 27 August 1,000 credit
31 August 4 September 4,000 credit

On this account:
- 5% interest is charged on debit balances
- no interest is earned on credit balances

The best estimate of the GBP interest charge for the month of August is:

(a) 6.16
(b) 6.58
(c) 7.12
(d) 8.22


72 In making a cross-border payment, the advantages of a corporate using a banking alliance
over a correspondent bank outside the alliance, include:

Strict service
levels agreed
Guaranteed availability
of funds
Fixed prices
(a) yes yes yes
(b) yes yes no
(c) yes no yes
(d) no yes yes
(e) no yes no
(f) no no yes


73 X and Y have overdrafts charging 5% interest.

X owes Y USD 400,000
Y owes X USD 500,000

If payments are subject to two days bank float, the best estimate of the USD saving that
could be achieved by bilateral netting is:

(a) 28
(b) 111
(c) 139
(d) 219
(e) 222


ITM 22

74 Enterprise risk management is desirable primarily because:

(a) it allows a competent specialist to manage risk
(b) it removes risk management from those incentivised to take risk
(c) it is good at capturing the impact of a single large dominant risk
(d) risks frequently interact


75 Corporate finance theory assumes that all investors:

Are rational Have the same level of
risk aversion

(a) yes yes
(b) yes no
(c) no yes
(d) no no


76 Over the last five years an investment has had annual returns of 7%, 9%, 5%, 2%,
and 7%. The best estimate of the standard deviation of future annual returns is:

(a) 2.37%
(b) 2.65%
(c) 5.60%
(d) 7.00%


77 AB plc currently has a BBB+ credit rating and plans to borrow funds in 12 months time.
AB plc believes the interest rate payable on these borrowed funds will vary with changes in
the companys credit rating and gearing ratio as shown below:

Change in company gearing ratio
-5% no change +5%
Credit
rating
A- 3.9% 4.0% 4.1%
BBB+ 4.8% 5.0% 5.2%
BBB 5.7% 6.0% 6.3%

Which of the following is most likely to cause the greatest increase in the interest payable
by AB plc on the planned new borrowing?

Change in AB plcs gearing: Change in AB plcs credit rating:

(a) 5% rise one notch improvement
(b) 5% fall one notch improvement
(c) 5% fall one notch deterioration
(d) no change one notch deterioration


ITM 23

78 A US company has a foreign currency receivable due for settlement in 10 days. The
receivable is worth USD 200,000 at todays spot rate. The 10 day standard deviation of
the spot rate is 0.4% assuming a normal distribution. The best estimate of the 10 day VaR
at a 99% confidence level is USD:

(a) 1,320
(b) 1,568
(c) 1,864
(d) 2,064


79 A company has an investment in a money market deposit. This exposes the company to:

Interest rate risk Liquidity risk
(a) yes yes
(b) yes no
(c) no yes
(d) no no


80 Libor is currently 4%. A company currently:
- has 50% floating rate and 50% fixed rate borrowings
- pays 5% on both fixed and floating borrowings
- has an interest cover ratio (EBIT/Interest) of 6.6

Libor subsequently rises to 5% across all maturities. The best estimate of the new interest
cover ratio for this company, assuming no debt refinancing during the period, is:

(a) 5.5
(b) 6.0
(c) 7.3
(d) 8.3


81 A German company tenders in EUR, its reporting currency, for a project in Japan. The
project would involve substantial JPY costs if the company wins the tender. Prior to the
award of the tender the company is exposed to foreign exchange:

Transaction risk Pre-transaction risk Translation risk

(a) yes yes no
(b) yes no no
(c) no yes yes
(d) no yes no


ITM 24

82 When comparing forward contracts with currency futures contracts, a currency futures
contract:

(a) has a wider range of possible currencies
(b) is more likely to provide an exact match to company requirements
(c) has lower counterparty risk
(d) is easier to manage for cash planning purposes


83 10 years ago AB plc issued a $60 million 15 year bond with a 6% fixed annual coupon.
Today, it enters into a 5 year interest rate swap for 4% (annual) against annual Libor as a
fair value hedge of $45 million of the debt. Taking the bond and the swap together, the
best estimate of the hedged interest rate on the $60 million bond plus swap for the next 5
years is:

(a) (Libor x 0.25) + 5%
(b) (Libor x 0.50) + 4%
(c) (Libor x 0.75) + 3%
(d) Libor + 2%


84 A 3 month European style put option over 100 shares has a strike price of $2 per share
and a total premium cost of $10. Ignoring the time value of money, the best overall profit
the option buyer could achieve is:

(a) $10 loss
(b) $0
(c) $190 profit
(d) $200 profit


85 In 2 months a company expects to have significant surplus funds for a period of 6 months.
To fix the interest rate achieved, the company should:

(a) buy a 0v2 FRA
(b) buy a 2v6 FRA
(c) buy a 2v8 FRA
(d) sell a 0v2 FRA
(e) sell a 2v6 FRA
(f) sell a 2v8 FRA


ITM 25

86 On 1 January, a corporate sold a 3v7 FRA at 4% over a nominal of EUR 10 million.

On 1 April, 4 month (122 day) EUR market rates are 4.88 5.00%. The best estimate of
the settlement amount paid or received by the corporate on 1 April is EUR:

(a) 29,300 paid
(b) 33,300 paid
(c) 33,900 paid
(d) 29,300 received
(e) 33,300 received
(f) 33,900 received


87 A corporate intends to make an investment in 4 months time for 6 months, and normally
receives 0.75% less than Libor on such deposits. It takes out a lenders option with a
strike rate of 4.00% against Libor at a premium of 0.12%.

4 months later 6 month Libor is 3.00%. The best estimate of the hedged rate achieved on
the investment plus the option is:

(a) 2.13%
(b) 2.25%
(c) 2.37%
(d) 3.13%
(e) 3.37%


88 A Corporate Treasurer is best advised to buy short term interest rate options (rather than
allowing the position to remain unhedged or using a forward rate agreement), if they:

(a) have no opinion on future interest rates
(b) believe rates will move adversely for the company
(c) wish to protect a potential future borrowing
(d) believe market volatility is overstated


89 A company requires a 10 year EUR 20 million variable rate borrowing. It could:
- borrow at a variable rate of 12 month Euribor + 2.00% directly or
- borrow at 5.50% fixed and enter into a 10 year swap priced at 3.00 3.05 against
12 month Euribor.

Borrowing at variable rate directly is:

(a) 45 basis points more expensive
(b) 50 basis points more expensive
(c) 45 basis points less expensive
(d) 50 basis points less expensive


ITM 26

90 Five years ago, a corporate entered a 10 million 8 year interest rate swap to pay 4%,
receive 12 month Libor.

Today, swap rates against 12 month Libor are:

3 years 3%
5 years 4%
8 years 5%

The best estimate of the current value of the swap to the corporate is:

(a) 272,000 asset
(b) 283,000 asset
(c) zero
(d) 272,000 liability
(e) 283,000 liability


91 A company has arranged:

- a USD variable rate loan for 5 years at USD Libor + 150 basis points
- an offsetting interest rate cap with a strike of 4.50% for an upfront cost of 1.50% of
the notional principal

The best estimate of the worst case hedged rate is:

(a) 4.5% pa
(b) 4.8% pa
(c) 5.7% pa
(d) 6.0% pa
(e) 6.3% pa
(f) 7.5% pa


92 A cross currency swap is arranged as follows:

- Principals: Receive USD 125 million; pay GBP 100 million
- Term: 5 years, with annual interest payments
- Interest rates: 3.2% USD; 4.0% GBP

After 5 years the spot rate is GBP/USD 1.3000. The final payment and receipt will be:

Payment: Receipt:
(a) USD 125 million GBP 100 million
(b) USD 129 million GBP 104 million
(c) USD 130 million GBP 100 million
(d) USD 134 million GBP 104 million


ITM 27

93 A US company wishes to hedge the receipt of SGD due in 3 months. Which of the
following is most appropriate as a hedge?

(a) buy a SGD call
(b) buy a SGD call and sell a SGD put
(c) buy a SGD call and buy a SGD put
(d) sell a SGD call and sell a SGD put
(e) sell a SGD put
(f) buy a SGD put and sell a SGD call


94 An employee of a large company is NOT authorised to use a payment portal supplied by
the companys bank. The employee fraudulently initiates a payment using the portal.
The bank confirms that the instruction has come from the company and then carries out
the instruction. The bank is likely to be required to reimburse the company by:

Banking regulators Sarbanes-Oxley
(a) yes yes
(b) yes no
(c) no yes
(d) no no


95 Treasury operational risk policies are most likely:

(a) to be developed by the internal audit department to deal with Treasury activities
(b) to cascade down from company financial risk policies, as applied to Treasury
(c) to be developed by Treasury to deal with Treasury activities


96 Examples of exception reports include those which list:

Unreconciled
items
Confirmed
transactions
Deals that have been
amended in the TMS
(a) yes yes yes
(b) yes yes no
(c) yes no yes
(d) no yes no
(e) no no yes


ITM 28

97 Which of the following are sources of treasury operational risks, as defined within ITM?

Internet access
problems
Foreign exchange
rate changes
Inexperienced
staff
(a) yes yes yes
(b) yes yes no
(c) yes no yes
(d) no yes no
(e) no no yes


98 A member of a professional accounting body is also a student member of the ACT.
- They do not work within a treasury department
- They have NOT paid their membership fees for their professional accounting body
and are therefore in breach of the rules of their professional accounting body

This person is:

(a) in breach of the ACT ethical code
(b) NOT in breach of the ACT ethical code because they are a student member
(c) NOT in breach of the ACT ethical code because it is a different professional body
(d) NOT in breach of the ACT ethical code because they do not work in treasury
(e) NOT in breach of the ACT ethical code, which does not cover subscriptions


99 Spreadsheets used in treasury management are most likely to be problematic because
they:

Include data types not
available in the TMS
Have no
audit trail
Are often only understood
by a few individuals

(a) yes yes yes
(b) yes no yes
(c) yes no no
(d) no yes yes
(e) no yes no
(f) no no no


100 Which of the following approaches are best suited to collecting data on whether a TMS
supplier is likely to meet the wider Treasury and business needs of a firm?

(a) A scorecard combined with supplier discussions
(b) A scorecard combined with a Request For Proposal
(c) Supplier discussions combined with a Request for Proposal



ITM 29

CertITM Formulae

Accounting formula
1.
Change in cash=
opening
balance sheet
figure
adjustments+
income-
expense
-
closing
balance sheet
figure


Present Value and future value formulae
2. ( )
n
n
r) (1
FV
r 1 FV PV
+
= + =


3. Annuity factor
( )
|
|
.
|

\
|
+
=
n
r 1
1
1
r
1
or
( ) r DF 1 =
4.
( ) g r
C
PV

=

5. IRR% = ( ) % a % b
) B A (
A
% a

+


Manipulating interest rates
6. IRR% =
days actual
year
price opening
price opening - price redemption
R =

7.
days
year
r R =
8. ( )
( )
1 r 1 r old
new
old new
+ =
9.
d 1
d
r

= and
r 1
r
d
+
=

10.


i 1
n 1
r 1
+
+
= +

11. ( ) ( )( )
long v short short long
r 1 r 1 r 1 + + = +
12. ( ) ( ) B/V Forward B/V Spot
r 1
r 1
B
V
=
+
+

13.

( )
n
n
DF CUM
DF 1 100
C

=




ITM 30

Corporate Finance formulae
14.
E D
E
k
E D
D
) T 1 ( k WACC
E c d
+
+
+
=
15. kE = rf + |(rm rf )
16.
g k
d
P
E
1

=

or

g
P
d
k
1
E
+ =


17. b r g =

18.
factor annuity
fee upfront
AEF =

19.
|
|
.
|

\
|
+
|
|
.
|

\
|
=
period forecast after
cashflows state steady
PV
period forecast
over cashflows
PV value corporate


Statistical formulae
22. Geometric mean:
( )( ) ( ) | |
( )
1 1 ... 1 1
1
2 1
+ + + n
n
r r r

23. Variance [X] =
2
=
population in Number
mean the from ns observatio of s difference squared of Sum

24. Variance [X] =
2
=
( ) 1 sample in Number
mean the from ns observatio of s difference squared of Sum

25. VaR = Exposure Z
TIME

26.
o

=
X
Z

Instruments
27.
|
|
.
|

\
|
+ =
365) or (360 year
life original
% rate issue 1 amount principal value future
28.
|
|
.
|

\
|
+ =
365) or (360 year
run to left days
yield market current 1 value future value present
29. ( )
( )
( ) sale on redemption to yield 1
purchase on redemption to yield 1
yield period holding 1
+
+
= +
30.
( )
year
days
R 1
1
year
days
R R P S
m
f m
+
=

ITM 31

Ratios
31. PI:
Flows Investment of PV
NPV Project
OR
Flows Investment of PV
flows investment - non of NPV

32. Accounting rate of return =
employed capital Average) (or Initial
profit accounting expected Average

33. ROCE =
debt) net plus reserves and capital (share employed Capital
profit Operating

34. Operating profit margin =
revenue
profits operating

35. Asset turnover = asset revenue =
employed capital
revenues

36. 65 3
sales of cost Annual
end period at Inventory
inventory Days =


37.
) (sales/365 day per sales average
taxes) sales of (net s receivable trade
days s receivable Trade =
38. Current ratio =
s liabilitie current
assets current

39. Acid test =
s liabilitie current
inventory less assets current

40.
Equity Debt
Debt
Leverage
+
=

ITM 32

NORMAL DISTRIBUTION TABLE



Area under the normal distribution curve between the mean and Z standard deviations from the mean.

Z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224

0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621

1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441

1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817

2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857
2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936
2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952

2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964
2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
2.9 0.4981 0.4982 0.4982 0.4982 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990

ITM 33

Solutions International Treasury Management April 2014



Q Answer Unit

Q Answer Unit

Q Answer Unit
1
b
Unit 1

35
d
Unit 2

68
d
Unit 4
2
a
Unit 1

36
f
Unit 2

69
c
Unit 4
3
e
Unit 1

37
b
Unit 2

70
b
Unit 4
4
e
Unit 1

38
a
Unit 2

71
b
Unit 4
5
a
Unit 1

39
a
Unit 2

72
a,c
Unit 4
6
a
Unit 1

40
c
Unit 3

73
e
Unit 4
7
b
Unit 1

41
b
Unit 3

74
d
Unit 5
8
d
Unit 1

42
b
Unit 3

75
b
Unit 5
9
d
Unit 1

43
d
Unit 3

76
b
Unit 5
10
a
Unit 1

44
c
Unit 3

77
d
Unit 5
11
b
Unit 1

45
b
Unit 3

78
c
Unit 5
12
a
Unit 1

46
a
Unit 3

79
a
Unit 5
13
a
Unit 1

47
c
Unit 3

80
b
Unit 5
14
e
Unit 1

48
c
Unit 3

81
d
Unit 5
15
d
Unit 1

49
a
Unit 3

82
c
Unit 5
16
b
Unit 1

50
d
Unit 3

83
c
Unit 5
17
d
Unit 1

51
c
Unit 3

84
c
Unit 5
18
b
Unit 1

52
a
Unit 3

85
f
Unit 5
19
c
Unit 1

53
a
Unit 3

86
b
Unit 5
20
d
Unit 2

54
a
Unit 3

87
d
Unit 5
21
c
Unit 2

55
d
Unit 3

88
a,b,c
Unit 5
22
b
Unit 2

56
d
Unit 3

89
d
Unit 5
23
c
Unit 2

57
b
Unit 3

90
e
Unit 5
24
a
Unit 2

58
c
Unit 3

91
e
Unit 5
25
c
Unit 2

59
a,b
Unit 3

92
b
Unit 5
26
b
Unit 2

60
c
Unit 4

93
f
Unit 5
27
b
Unit 2

61
d
Unit 4

94
d
Unit 6
28
b
Unit 2

62
d
Unit 4

95
c
Unit 6
29
b
Unit 2

63
c
Unit 4

96
c
Unit 6
30
e
Unit 2

64
c
Unit 4

97
d
Unit 6
31
d
Unit 2

65
b
Unit 4

98
a
Unit 6
32
b
Unit 2

66
c
Unit 4

99
d
Unit 6
33
a
Unit 2

67
d
Unit 4

100
a,b,c
Unit 6
34
e
Unit 2











ITM 34

ITM Examiners Report April 2014

The exam consisted of 19, 20, 20, 14, 20,and 7 questions from study units 1 to 6 respectively.

17 (3) candidates selected more than one answer on a single question. These scripts were carefully
examined to check that one of these answers had not been badly erased, and this was not the case.
No credit can be given where more than one answer is selected for a single question.

53 (33) candidates chose not to answer all questions. Marks are NOT deducted for incorrect
answers, and candidates are therefore encouraged to give an answer for all questions, even those
where they are unsure of the correct answer.

It would appear some candidates mark the question paper with their answers and then transpose
these answers to their answer sheet at the end of the exam. This sometimes results in such
candidates running out of time in the exam. This approach is not recommended: candidates are
advised to complete their answer paper as they progress through their exam.

After the exam, and with the aid of both statistical analysis and candidate feedback, the ITM board
identified 4 questions where it decided that more than one option deserved full credit.

The pass mark is designed to reflect the average performance expected of a competent student with
a reasonable familiarity with the ITM learning materials who has studied reasonably diligently. A
pass mark was set before the exam by assessing the difficulty of each question and collating these
judgements. Following post exam analysis, the ITM Board chose to reduce the pass mark set before
the exam.

Following this adjustment, the pass rate for this diet was 50.6% (59.4% in October 2013). The
maximum score in this exam was 94% (96% Oct 2013) and the minimum was 23% (19% Oct 2013).
Making a random selection of options in the exam would on average score 24.1 (24.7%).

The pass rate for each study unit was as follows:

Full SU 1 SU 2 SU 3 SU 4 SU 5 SU6
Apr14 50.6 51.1 48.6 71.9 40.3 48.1 78.3

The overall pass rate for this diet is extremely concerning.

The ITM Board examined a large proportion of the exam questions set in the context of overall
candidate performance, candidate feedback and statistical analysis, but concluded that there were no
grounds for reducing the pass mark beyond the level finally adopted.

Candidate performance in this diet was significantly worse on both numerical and knowledge based
questions. The average pass rate for questions testing calculations was 43.1% (Oct13: 55.8%), and
for questions testing knowledge was 60.0% (Oct13: 77.3%). The correlation between performance in
calculation questions and the overall exam was 0.95, and between knowledge questions and the
overall exam was also 0.95. This supports the view that students must score reasonably in both
types of question to pass the exam overall.


ITM 35

For those candidates for which data on prior qualification was held, the pass rate for professionally
qualified accountants was 59% (77% Oct13), and those with no such qualification was 44% (54%
Oct13). The examiner strongly recommends non-accountants who intend to attempt CertITM should
take the AMCT stage one paper (Certificate in Financial Fundamentals for Business, CertFin) prior to
CertITM. CertFin provides a framework of core knowledge and establishes the underlying financial
understanding that underpins corporate treasury.

However, candidates with an accounting qualification should not assume this examination is
straightforward. It seems likely the higher pass rate on Unit 3 reflects the greater familiarity the
average candidate has with corporate finance theory. Clearly this familiarity, whilst an advantage, is
not sufficient to obtain a pass in isolation. Treasury specific knowledge and calculations in units 1, 2,
4 and 5 are also critical.

There is no evidence that English proficiency was a discriminating factor. European students for
whom English was not their first language had a 72% pass rate, which significantly exceeded that of
candidates registered from OECD English speaking countries (51%).

All candidates are encouraged to make full use of the ITM website forum and to study the ACT
material diligently. Candidates are particularly encouraged to attempt past exam questions to
understand the format of the exam, and the types of questions covered. There is significant
repetition of knowledge tested from one exam to the next, and practice on past questions will be
rewarded.

The performance of candidates who attended ACT or ACT training partner classes, whether
classroom or online based, was significantly better than those who did not.