CIMA Updated F3 Exam Questions and Answers by ariya

Imports and exports are in US$, home currency is RS. Each company has the same total revenue/cost level; what differs is their net US$ exposure, which drives how sensitive profit growth is to the US$/RS rate.

From the table:

Company L: Imports 10, Exports 20 → net export +10 US$m

Company M: Imports 0, Exports 18 → net export +18 US$m

Company N: Imports 25, Exports 21 → net import −4 US$m

Company O: Imports 15, Exports 0 → net import −15 US$m

Sensitivity to exchange rate = size of the net US$ position (absolute value).

Comparing: |+10|, |+18|, |−4|, |−15| → the largest is 18 for Company M.

So Company M’s operating profit growth is most sensitive to movements in the US$/RS rate.

✅ Answer: B – Company M

Current year sales in M$

Units = 100,000

Price = M$12

Revenue = 100,000 × 12 = M$1,200,000

Convert to L$ at current rate

Spot: L$1 = M$5 → 1 M$ = 0.2 L$

Current L$ revenue = 1,200,000 × 0.2 = L$240,000

Target L$ revenue (10% growth)

240,000 × 1.10 = L$264,000

Effect of a 5% strengthening of the L$

L$ strengthens ⇒ more M$ per L$

New rate = 5 × 1.05 = M$5.25 per L$

1 M$ = 1/5.25 ≈ 0.190476 L$

Required units next year

L$ revenue = Units × 12 M$ × 0.190476 L$/M$

So Units = 264,000 ÷ (12 × 0.190476)

12 × 0.190476 ≈ 2.285712

Units ≈ 264,000 ÷ 2.285712 ≈ 115,500 units

So the correct choice is A. 115,500 units.

Interest rate swaps are covered in CIMA F3 under risk management and derivative instruments, specifically as tools for managing interest rate risk. An interest rate swap is an agreement between two parties to exchange interest payment obligations, typically swapping fixed-rate interest payments for floating-rate payments, or vice versa, on a notional principal amount.

Option A is TRUE.

CIMA F3 recognises that although swaps are primarily used for hedging, some companies may enter into interest rate swaps for speculative or risk-taking purposes. If management believes it has superior forecasts of future interest rate movements compared to the market, it may deliberately increase exposure to interest rate risk by swapping into floating rates or fixed rates accordingly. This behaviour is discussed in F3 as speculation rather than pure hedging.

Option E is TRUE.

An interest rate swap is an external hedging technique. CIMA F3 clearly distinguishes between:

Internal hedging (e.g. matching assets and liabilities, netting, leading and lagging), and

External hedging, which involves using financial instruments with third parties, such as forwards, futures, options and swaps.

Since a swap involves a counterparty (often a bank or financial institution), it is classified as an external hedge.

The remaining options are incorrect:

B is FALSE. Default risk does not automatically become “high” for the floating-rate payer when interest rates rise; it depends on the firm’s overall financial strength and cash flows. Rising rates increase payments, but not necessarily default risk to a high level.

C is FALSE. When interest rates fall, the fixed-rate payer is at a disadvantage (paying above-market rates), which may increase rather than reduce financial strain.

D is FALSE. An interest rate swap is not an internal hedging technique; it requires an external counterparty.

✅ Final Answer: A and E

A. Net book value (NBV) is based on historical cost and accounting conventions → it often doesn’t reflect current economic value. This is a disadvantage.

C. Many intangibles (brands, know-how, human capital, internally generated IP) are not recognised on the balance sheet, so a net asset valuation can seriously understate value → disadvantage.

D. Net realisable value (what assets could actually be sold for) is usually different from NBV, again showing NBV is a poor proxy for real value → disadvantage.

B. “Can be obtained from the financial statements” – that’s an advantage (it’s easy and cheap).

E. NBV of current assets is often reasonably close to realisable value (especially cash, receivables less bad debts, short-term inventory), so that’s not a disadvantage.

So the three disadvantages are A, C and D.