advanced financial management s18 amended -...

Advanced Financial Management

© ACCA 2018-2019 All rights reserved.

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The structure of thesyllabus and study guide

Relational diagram of AdvancedFinancial Management with otherexams

This diagram shows direct and indirectlinks between this exam and otherexams preceding or following it. Someexams are directly underpinned byothers such as Advanced PerformanceManagement by PerformanceManagement. These links are shown assolid line arrows. Other exams only haveindirect relationships with each othersuch as links existing between theaccounting and auditing exams. Thelinks between these are shown asdotted line arrows. This diagramindicates where you are expected tohave underpinning knowledge andwhere it would be useful to reviewprevious learning before undertakingstudy.

Overall aim of the syllabus

This explains briefly the overall objectiveof the syllabus and indicates in thebroadest sense the capabilities to bedeveloped within the exam.

Main capabilities

The aim of this syllabus is broken downinto several main capabilities whichdivide the syllabus and study guide intodiscrete sections.

Relational diagram of the maincapabilities

This diagram illustrates the flows andlinks between the main capabilities(sections) of the syllabus and should be

used as an aid to planning teaching andlearning in a structured way.

Syllabus rationale

This is a narrative explaining how thesyllabus is structured and how the maincapabilities are linked. The rationalealso explains in further detail what theexamination intends to assess and why.

Detailed syllabus

This shows the breakdown of the maincapabilities (sections) of the syllabusinto subject areas. This is the blueprintfor the detailed study guide.

Approach to examining the syllabus

This section briefly explains thestructure of the examination and how itis assessed.

Study GuideThis is the main document that students,learning and content providers shoulduse as the basis of their studies,instruction and materials. Examinationswill be based on the detail of the studyguide which comprehensively identifieswhat could be assessed in anyexamination session. The study guide isa precise reflection and breakdown ofthe syllabus. It is divided into sectionsbased on the main capabilities identifiedin the syllabus. These sections aredivided into subject areas which relate tothe sub-capabilities included in thedetailed syllabus. Subject areas arebroken down into sub-headings whichdescribe the detailed outcomes thatcould be assessed in examinations.These outcomes are described usingverbs indicating what exams mayrequire students to demonstrate, and the



broad intellectual level at which thesemay need to be demonstrated(*see intellectual levels below).

Intellectual Levels

The syllabus is designed toprogressively broaden and deepen theknowledge, skills and professionalvalues demonstrated by the student ontheir way through the qualification.

The specific capabilities within thedetailed syllabuses and study guides areassessed at one of three intellectual orcognitive levels:

Level 1: Knowledge andcomprehension

Level 2: Application and analysisLevel 3: Synthesis and evaluation

Very broadly, these intellectual levelsrelate to the three cognitive levels atwhich the Applied Knowledge,the Applied Skills and the StrategicProfessional examsare assessed.

Each subject area in the detailed studyguide included in this document is givena 1, 2, or 3 superscript, denotingintellectual level, marked at the end ofeach relevant line. This gives anindication of the intellectual depth atwhich an area could be assessed withinthe examination. However, while level 1broadly equates with AppliedKnowledge , level 2 equates to AppliedSkills and level 3 to StrategicProfessional, some lower level skills cancontinue to be assessed as the studentprogresses through each level. Thisreflects that at each stage of study therewill be a requirement to broaden, as wellas deepen capabilities. It is alsopossible that occasionally some higherlevel capabilities may be assessed atlower levels.

Learning Hours andEducation Recognition

The ACCA qualification does notprescribe or recommend any particularnumber of learning hours forexaminations because study andlearning patterns and styles vary greatlybetween people and organisations. Thisalso recognises the wide diversity ofpersonal, professional and educationalcircumstances in which ACCA studentsfind themselves.

As a member of the InternationalFederation of Accountants, ACCA seeksto enhance the education recognition ofits qualification on both national andinternational education frameworks, andwith educational authorities and partnersglobally. In doing so, ACCA aims toensure that its qualifications arerecognized and valued by governments,regulatory authorities and employersacross all sectors. To this end, ACCAqualifications are currently recognizedon the education frameworks in severalcountries. Please refer to your nationaleducation framework regulator forfurther information.

Each syllabus contains between 20 and35 main subject area headingsdepending on the nature of the subjectand how these areas have been brokendown.



Guide to Exam Structure

The structure of examinations varieswithin and between levels.

The Applied Knowledge examinationscontain 100% compulsory questions toencourage candidates to study acrossthe breadth of each syllabus.

The Applied Knowledge exams areassessed by equivalent two-hourcomputer based and paper basedexaminations.

The Corporate and Business Law examis a two-hour computer-based objectivetest examination for English and Global,and available as a paper based versionfor all variants.

The other Applied Skills examinations,contain a mix of objective and longertype questions with a duration of threehours for 100 marks.* These areavailable as computer-based and paper-based exams. In the computer-basedexams there may be instances wherewe have extra content for the purposesof ongoing quality assurance andsecurity.

*For paper-based exams there is anextra 15 minutes to reflect the manualeffort required.

Strategic Business Leader is ACCA’scase study examination at the StrategicProfessional level and is examined as aclosed book exam of four hours,including reading, planning andreflection time which can be usedflexibly within the examination. There isno pre-seen information and all examrelated material, including caseinformation and exhibits are availablewithin the examination. StrategicBusiness Leader is an exam based onone main business scenario which

involves candidates completing severaltasks within which additional materialmay be introduced. All questions arecompulsory and each examination willcontain a total of 80 technical marks and20 Professional Skills marks. The detailof the structure of this exam is describedin the Strategic Business Leadersyllabus and study guide document.

The other Strategic Professional examsare all of three hours and 15 minutesduration. All contain twoSections and all questions arecompulsory. These exams all containfour professional marks. The detail ofthe structure of each of these exams isdescribed in the individual syllabusdocuments.

ACCA encourages students to take timeto read questions carefully and to plananswers but once the exam time hasstarted, there are no additionalrestrictions as to when candidates maystart writing in their answer books.

Time should be taken to ensure that allthe information and exam requirementsare properly read and understood.

The pass mark for all ACCAQualification examinations is 50%.



Guide to ExaminationAssessment

ACCA reserves the right to examineanything contained within the studyguide at any examination session. Thisincludes knowledge, techniques,principles, theories, and concepts asspecified. For the financial accounting,audit and assurance, law and tax examsexcept where indicated otherwise,ACCA will publish examinabledocuments once a year to indicateexactly what regulations and legislationcould potentially be assessed withinidentified examination sessions.

For examinations, regulation issued orlegislation passed on or before 1September annually, will be examinablefrom 1 September of the following yearto 31 August of the year after that.Please refer to the examinabledocuments for the exam (whererelevant) for further information.

Regulation issued or legislation passedin accordance with the above dates maybe examinable even if the effective dateis in the future.

The term issued or passed relates towhen regulation or legislation has beenformally approved.

The term effective relates to whenregulation or legislation must be appliedto an entity transactions and businesspractices.

The study guide offers more detailedguidance on the depth and level atwhich the examinable documents will beexamined. The study guide shouldtherefore be read in conjunction with theexaminable documents list.



Syllabus

This syllabus and study guide is designed to help with planning study and to providedetailed information on what could be assessed in any examination session.

Syllabus

Aim

To apply relevant knowledge, skills andexercise professional judgement asexpected of a senior financial executiveor advisor, in taking or recommendingdecisions relating to the financialmanagement of an organisation inprivate and public sectors.

Relational diagram

This diagram shows direct and indirectlinks between this exam and otherexams preceding or following it. Someexams are directly underpinned by otherexams such as Advanced PerformanceManagement by Performance Management. These links are shown as solid linearrows. Other exams only have indirect relationships with each other such as linksexisting between the accounting and auditing exams. The links between these areshown as dotted line arrows. This diagram indicates where you are expected tohave underpinning knowledge and where it would be useful to review previouslearning before undertaking study.

StrategicBusinessLeader

AdvancedFinancial

Management

ManagementAccounting

FinancialManagement



Main capabilities

On successful completion of this exam, candidates should be able to:

A Explain and evaluate the role and responsibility of the senior financial executiveor advisor in meeting conflicting needs of stakeholders and recognise the role ofinternational financial institutions in the financial management of multinationals

B Evaluate potential investment decisions and assessing their financial andstrategic consequences, both domestically and internationally

C Assess and plan acquisitions and mergers as an alternative growth strategy

D Evaluate and advise on alternative corporate re-organisation strategies

E Apply and evaluate alternative advanced treasury and risk managementtechniques

This diagram illustrates the flows and links between the main capabilities (sections)of the syllabus and should be used as an aid to planning teaching and learning in astructured way.



Rationale

This syllabus develops upon the corefinancial management knowledge andskills covered in the FinancialManagement syllabus and preparescandidates to advise managementand/or clients on complex strategicfinancial management issues facing anorganisation.

The syllabus starts by exploring the roleand responsibility of a senior executiveor advisor in meeting competing needsof stakeholders within the businessenvironment of multinationals. Thesyllabus then re-examines investmentand financing decisions, with theemphasis moving towards the strategicconsequences of making such decisionsin a domestic, as well as international,context. Candidates are then expectedto develop further advisory skills inplanning strategic acquisitions andmergers and corporate re-organisations.

The next part of the syllabus re-examines, in the broadest sense, theexistence of risks in business and thesophisticated strategies which areemployed in order to manage such risks.It builds on what candidates would have

covered in the Financial Managementsyllabus.



Detailed syllabus andexam format

A Role of senior financial adviser inthe multinational organisation

1. The role and responsibility of seniorfinancial executive/advisor

2. Financial strategy formulation

3. Ethical and governance issues

4. Management of international tradeand finance

5. Strategic business and financialplanning for multinationalorganisations

6. Dividend policy in multinationals andtransfer pricing

B Advanced investment appraisal

1. Discounted cash flow techniques

2. Application of option pricing theory ininvestment decisions

3. Impact of financing on investmentdecisions and adjusted presentvalues

4. Valuation and the use of free cashflows

5. International investment andfinancing decisions

C Acquisitions and mergers

1. Acquisitions and mergers versusother growth strategies

2. Valuation for acquisitions andmergers

3. Regulatory framework andprocesses

4. Financing acquisitions and mergers

D Corporate reconstruction and re-organisation

1. Financial reconstruction

2. Business re-organisation

E Treasury and advanced riskmanagement techniques

1. The role of the treasury function inmultinationals

2. The use of financial derivatives tohedge against forex risk

3. The use of financial derivatives tohedge against interest rate risk



Approach to examining the syllabus

The Advanced Financial Management exam builds upon the skills and knowledgeexamined in the Financial Management exam. At this stage candidates will beexpected to demonstrate an integrated knowledge of the subject and an ability torelate their technical understanding of the subject to issues of strategic importanceto the organisation. The study guide specifies the wide range of contextualunderstanding that is required to achieve a satisfactory standard at this level.

Examination Structure

The syllabus is assessed by a three-hour 15 minutes examination.

Section A

Section A will always be a single 50 mark case study, which will contain fourprofessional marks in which candidates are required produce a business documentsuch as a report or a briefing paper for the board of directors.

Candidates should understand that they will be expected to undertake calculations,draw comparison against relevant information where appropriate, analyse theresults and offer recommendations or conclusions as required.

Financial managers are required to look across a range of issues which affect anorganisation and its finances, so candidates should expect to see the case studyfocus on a range of issues from at least two syllabus sections from A - E. These willvary depending on the business context of the case study.

Section B

Section B will consist of two compulsory 25 mark questions. All section B questionswill be scenario based and contain a combination of calculation and narrative marks.There will not be any wholly narrative questions.

All topics and syllabus sections will be examinable in either section A or section B ofthe exam, but every exam will have questions which have a focus on syllabussections B and E.

Total 100 marks



Study Guide

A. Role of the senior financialadviser in themultinational organisation

1. The role and responsibility ofsenior financial executive/advisor

a) Develop strategies for theachievement of the organisationalgoals in line with its agreed policyframework. [3]

b) Recommend strategies for themanagement of the financialresources of the organisation suchthat they are utilised in an efficient,effective and transparent way. [3]

c) Advise the board of directors ormanagement of the organisation insetting the financial goals of thebusiness and in its financial policydevelopment with particularreference to: [3]

i) Investment selection and capitalresource allocation

ii) Minimising the cost of capital

iii) Distribution and retention policy

iv) Communicating financial policyand corporate goals to internaland external stakeholders

v) Financial planning and control

vi) The management of risk.

2. Financial strategy formulation

a) Assess organisational performanceusing methods such as ratios andtrends [3]

b) Recommend the optimum capitalmix and structure within a specifiedbusiness context and capital assetstructure.[3]

c) Recommend appropriate distributionand retention policy.[3]

d) Explain the theoretical and practicalrationale for the management of

risk. [3]

e) Assess the organisation’s exposureto business and financial riskincluding operational, reputational,political, economic, regulatory andfiscal risk.[3]

f) Develop a framework for riskmanagement, comparing andcontrasting risk mitigation, hedgingand diversification strategies.[3]

g) Establish capital investmentmonitoring and risk managementsystems.[3]

h) Advise on the impact of behaviouralfinance on financial strategies /securities prices and why they maynot follow the conventional financialtheories. [3]

3. Ethical and governance issues

a) Assess the ethical dimension withinbusiness issues and decisions andadvise on best practice in thefinancial management of theorganisation.[3]

b) Demonstrate an understanding ofthe interconnectedness of the ethicsof good business practice betweenall of the functional areas of theorganisation.[2]

c) Recommend, within specifiedproblem domains, appropriatestrategies for the resolution ofstakeholder conflict and advise on



alternative approaches that may beadopted. [3]

d) Recommend an ethical frameworkfor the development of anorganisation’s financial policies anda system for the assessment of itsethical impact upon the financialmanagement of the organisation.[3]

e) Explore the areas within the ethicalframework of the organisation whichmay be undermined by agencyeffects and/or stakeholder conflictsand establish strategies for dealingwith them.[3]

f) Establish an ethical financial policyfor the financial management of theorganisation which is grounded ingood governance, the higheststandards of probity and is fullyaligned with the ethical principles ofthe Association. [3]

g) Assess the impact on sustainabilityand environmental issues arisingfrom alternative organisationalbusiness and financial decisions. [3]

h) Assess and advise on the impact ofinvestment and financing strategiesand decisions on the organisation’sstakeholders, from an integratedreporting and governanceperspective [2]

4. Management of international tradeand finance

a) Advise on the theory and practice offree trade and the management ofbarriers to trade.[3]

b) Demonstrate an up to dateunderstanding of the major tradeagreements and common marketsand, on the basis of contemporarycircumstances, advise on their

policies and strategic implications fora given business.[3]

c) Discuss how the actions of theWorld Trade Organisation, theInternational Monetary Fund, TheWorld Bank and Central Banks canaffect a multinational organisation.[2]

d) Discuss the role of internationalfinancial institutions within thecontext of a globalised economy,with particular attention to (the Fed,Bank of England, European CentralBank and the Bank of Japan).[2]

e) Discuss the role of the internationalfinancial markets with respect to themanagement of global debt, thefinancial development of theemerging economies and themaintenance of global financialstability.[2]

f) Discuss the significance to theorganisation, of latest developmentsin the world financial markets suchas the causes and impact of therecent financial crisis; growth andimpact of dark pool trading systems;the removal of barriers to the freemovement of capital; and theinternational regulations on moneylaundering. [2]

g) Demonstrate an awareness of newdevelopments in the macroeconomicenvironment, assessing their impactupon the organisation, and advisingon the appropriate response to thosedevelopments both internally andexternally.[2]



5. The Strategic business andfinancial planning formultinationals

a) Advise on the development of afinancial planning framework for amultinational organisation taking intoaccount:[3]

i) Compliance with nationalregulatory requirements (for

example the London

Stock Exchange admission

requirements)

ii) The mobility of capital across

borders and national limitations

on remittances and transfer

pricing

iii) The pattern of economic and

other risk exposures in the

different national markets

iv) Agency issues in the central

coordination of overseas

operations and the balancing of

local financial autonomy witheffective central control.

6. Dividend policy in multinationalsand transfer pricing

a) Determine a corporation’s dividendcapacity and its policy given:

[3]

i) The corporation’s short- andlong-term reinvestment strategy

ii) The impact of capitalreconstruction programmes suchas share repurchase agreementsand new capital issues on freecash flow to equity.

iii) The availability and timing ofcentral remittances

iv) The corporate tax regime withinthe host jurisdiction.

b) Advise, in the context of a specifiedcapital investment programme, onan organisation’s current andprojected dividend capacity.[3]

c) Develop organisational policy on thetransfer pricing of goods andservices across international bordersand be able to determine the mostappropriate transfer pricing strategyin a given situation reflecting localregulations and tax regimes.[3]

B. Advanced investmentappraisal

1. Discounted cash flow techniques

a) Evaluate the potential value addedto an organisation arising from aspecified capital investment projector portfolio using the net presentvalue (NPV) model.[3]

Project modelling should includeexplicit treatment and discussion of:

i) Inflation and specific pricevariation

ii) Taxation including tax allowabledepreciation and tax exhaustion

iii) Single period and multi-periodcapital rationing. Multi-periodcapital rationing to include theformulation of programmingmethods and the interpretation oftheir output

iv) Probability analysis andsensitivity analysis whenadjusting for risk and uncertaintyin investment appraisal

v) Risk adjusted discount rates

vi) Project duration as a measure ofrisk.



b) Outline the application of MonteCarlo simulation to investmentappraisal.[2] Candidates will not beexpected to undertake simulations inan examination context but will beexpected to demonstrate anunderstanding of:

i) The significance of thesimulation output and theassessment of the likelihood ofproject success

ii) The measurement andinterpretation of project value atrisk.

c) Establish the potential economicreturn (using internal rate of return(IRR) and modified internal rate ofreturn) and advise on a project’sreturn margin. Discuss the relativemerits of NPV and IRR.[3]

2. Application of option pricingtheory in investment decisions

a) Apply the Black-Scholes OptionPricing (BSOP) model to financialproduct valuation and to assetvaluation:[3]

i) Determine and discuss, usingpublished data, the five principaldrivers of option value (value ofthe underlying, exercise price,time to expiry, volatility and therisk-free rate)

ii) Discuss the underlyingassumptions, structure,application and limitations of theBSOP model.

b) Evaluate embedded real optionswithin a project, classifying them intoone of the real option archetypes.[3]

c) Assess, calculate and advise on thevalue of options to delay, expand,

redeploy and withdraw using theBSOP model.[3]

3. Impact of financing on investmentdecisions and adjusted presentvalues

a) Identify and assess theappropriateness of the range ofsources of finance available to anorganisation including equity, debt,hybrids, lease finance, venturecapital, business angel finance,private equity, asset securitisationand sale and Islamic finance.Including assessment on thefinancial position, financial risk andthe value of an organisation.[3]

b) Discuss the role of, anddevelopments in, Islamic financingas a growing source of finance fororganisations; explaining therationale for its use, and identifyingits benefits and deficiencies.[2]

c) Calculate the cost of capital of anorganisation, including the cost ofequity and cost of debt, based onthe range of equity and debtsources of finance. Discuss theappropriateness of using the cost ofcapital to establish project andorganisational value, and discuss itsrelationship to such value.[3]

d) Calculate and evaluate projectspecific cost of equity and cost ofcapital, including their impact on theoverall cost of capital of anorganisation. Demonstrate detailedknowledge of business and financialrisk, the capital asset pricing modeland the relationship between equityand asset betas.[3]

e) Assess an organisation’s debtexposure to interest rate changes



using the simple Macaulay durationand modified duration methods. [3]

f) Discuss the benefits and limitationsof duration including the impact ofconvexity. [3]

g) Assess the organisation’s exposureto credit risk, including: [3]

i) Explain the role of, and the riskassessment models used by theprincipal rating agencies

ii) Estimate the likely credit spreadover risk free

iii) Estimate the organisation’scurrent cost of debt capital usingthe appropriate term structure ofinterest rates and the creditspread.

h) Assess the impact of financing andcapital structure upon theorganisation with respect to:[3]

i) Modigliani and Millerpropositions, before and after tax

ii) Static trade-off theoryiii) Pecking order propositionsiv) Agency effects.

i) Apply the adjusted present valuetechnique to the appraisal ofinvestment decisions that entailsignificant alterations in the financialstructure of the organisation,including their fiscal andtransactions cost implications.[3]

j) Assess the impact of a significantcapital investment project upon thereported financial position andperformance of the organisationtaking into account alternativefinancing strategies.[3]

4. Valuation and the use of free cashflows

a) Apply asset based, income basedand cash flow based models to

value equity. Apply appropriatemodels, including term structure ofinterest rates, the yield curve andcredit spreads, to value corporatedebt.[3]

b) Forecast an organisation’s free cashflow and its free cash flow to equity(pre and post capitalreinvestment).[3]

c) Advise on the value of anorganisation using its free cash flowand free cash flow to equity underalternative horizon and growthassumptions.[3]

d) Explain the use of the BSOP modelto estimate the value of equity of anorganisation and discuss theimplications of the model for achange in the value of equity.[2]

e) Explain the role of BSOP model inthe assessment of default risk, thevalue of debt and its potentialrecoverability. [2]

5. International investment andfinancing decisions

a) Assess the impact upon the value ofa project of alternative exchangerate assumptions.[3]

b) Forecast project or organisation freecash flows in any specified currencyand determine the project’s netpresent value or organisation valueunder differing exchange rate, fiscaland transaction cost assumptions.[2]

c) Evaluate the significance ofexchange controls for a giveninvestment decision and strategiesfor dealing with restrictedremittance.[3]

d) Assess the impact of a project uponan organisation’s exposure totranslation, transaction andeconomic risk.[3]



e) Assess and advise on the costs andbenefits of alternative sources offinance available within theinternational equity and bondmarkets.[3]

C. Acquisitions and mergers

1. Acquisitions and mergers versusother growth strategies

a) Discuss the arguments for andagainst the use of acquisitions andmergers as a method of corporateexpansion.[2]

b) Evaluate the corporate andcompetitive nature of a givenacquisition proposal.[3]

c) Advise upon the criteria for choosingan appropriate target foracquisition.[3]

d) Compare the various explanationsfor the high failure rate ofacquisitions in enhancingshareholder value.[3]

e) Evaluate, from a given context, thepotential for synergy separatelyclassified as:[3]

i) Revenue synergy

ii) Cost synergy

iii) Financial synergy.

f) Evaluate the use of the reversetakeover as a method of acquisitionand as a way of obtaining a stockmarket listing:[3]

2. Valuation for acquisitions andmergers

a) Discuss the problem ofovervaluation.[2]

b) Estimate the potential near-termand continuing growth levels of acorporation’s earnings using bothinternal and external measures.[3]

c) Discuss, assess and advise on thevalue created from an acquisition ormerger of both quoted and unquotedentities using models such as:[3]

i) ’Book value-plus’ models

ii) Market based models

iii) Cash flow models, including freecash flows.

Taking into account the changes inthe risk profile and risk exposure ofthe acquirer and the target entities

d) Apply appropriate methods, such as:risk-adjusted cost of capital,adjusted net present values andchanging price-earnings multipliersresulting from the acquisition ormerger, to the valuation processwhere appropriate.[3]

e) Demonstrate an understanding ofthe procedure for valuing highgrowth start-ups.[2]

3. Regulatory framework andprocesses

a) Demonstrate an understanding ofthe principal factors influencing thedevelopment of the regulatoryframework for mergers andacquisitions globally and, inparticular, be able to compare andcontrast the shareholder versus thestakeholder models of regulation.[2]

b) Identify the main regulatory issueswhich are likely to arise in thecontext of a given offer and

i) assess whether the offer is likelyto be in the shareholders’ bestinterests



ii) advise the directors of a targetentity on the most appropriatedefence if a specific offer is to betreated as hostile.[3]

4. Financing acquisitions andmergers

a) Compare the various sources offinancing available for a proposedcash-based acquisition. [3]

b) Evaluate the advantages anddisadvantages of a financial offer fora given acquisition proposal usingpure or mixed mode financing andrecommend the most appropriateoffer to be made.[3]

c) Assess the impact of a givenfinancial offer on the reportedfinancial position and performance ofthe acquirer.[3]

D. Corporate reconstructionand re-organisation

1. Financial reconstruction

a) Assess an organisational situationand determine whether a financialreconstruction is an appropriatestrategy for a given businesssituation.[3]

b) Assess the likely response of thecapital market and/or individualsuppliers of capital to anyreconstruction scheme and theimpact their response is likely tohave upon the value of theorganisation.[3]

2. Business re-organisation

a) Recommend, with reasons,strategies for unbundling parts of aquoted company.[3]

b) Evaluate the likely financial andother benefits of unbundling.[3]

c) Advise on the financial issuesrelating to a management buy-outand buy-in.[3]

E. Treasury and advanced riskmanagement techniques

1. The role of the treasury functionin multinationals

a) Discuss the role of the treasurymanagement function within:[3]

i) The short term management ofthe organisation’s financialresources

ii) The longer term maximisation ofcorporate value

iii) The management of riskexposure.

b) Discuss the operations of thederivatives market, including:[3]

i) The relative advantages anddisadvantages of exchangetraded versus OTC agreements

ii) Key features, such as standardcontracts, tick sizes, marginrequirements and margin trading

iii) The source of basis risk and howit can be minimised.

iv) Risks such as delta, gamma,vega, rho and theta, and howthese can be managed.



2. The use of financial derivatives tohedge against forex risk

a) Assess the impact on anorganisation to exposure intranslation, transaction andeconomic risks and how these canbe managed. [3]

b) Evaluate, for a given hedgingrequirement, which of the followingis the most appropriate strategy,given the nature of the underlyingposition and the risk exposure:[3]

i) The use of the forward exchangemarket and the creation of amoney market hedge

ii) Synthetic foreign exchangeagreements (SAFEs)

iii) Exchange-traded currencyfutures contracts

iv) Currency swaps

v) FOREX swaps

vi) Currency options.

c) Advise on the use of bilateral andmultilateral netting and matching astools for minimising FOREXtransactions costs and themanagement of market barriers tothe free movement of capital andother remittances.[3]

3. The use of financial derivatives tohedge against interest rate risk

a) Evaluate, for a given hedgingrequirement, which of the followingis the most appropriate given thenature of the underlying position andthe risk exposure:[3]

i) Forward Rate Agreements(FRAs)

ii) Interest rate futures

iii) Interest rate swaps

iv) Interest rate options.

advanced financial management s18 amended -...

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