Exam 10: Foreign Currency Transactions

The forward rate in a forward contract

A forward exchange contract is being transacted at a premium if the current forward rate is

The two distinguishing characteristics of a derivative are

On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows: The American firm's fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%. What is the recorded value of the Forward Contract on 6/1/X2?

Exchange gains and losses on a forward exchange contract that covers the same time period as the transaction which it provides a fair value hedge for should be recognized as

A fair value hedge may include hedges against the change in the fair value of all but:

Describe the risks and uncertainty a U.S. company faces when purchasing goods from a foreign corporation and settling the transaction in the foreign currency.

On November 1, 20X1, DEMO Corp., a U.S. firm, sold merchandise to a foreign firm for 60,000 FC. DEMO will be paid on January 31, 20X2, in FC. The spot rates on selected dates were as follows: Required: Assuming that DEMO has a December 31 year end, prepare the necessary journal entries to account for the series of transactions involving the sale.

A derivative:

Which of the following statements is not true regarding forward contracts that cover periods of time different from the settlement period (transaction date to the settlement date)?

On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 9/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 9/1/X2. The exchange rates were as follows: The American firm's fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%. The transaction qualifies as for accounting as a cash flow hedge. What is the amount that will be recognized in earnings in the year ended 6/30/X2?

Which of the following factors influences the spread between forward and spot rates?

In a credit transaction resulting in an exposed asset or liability, gains and losses on foreign currency transactions should be recognized:

On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows: The American firm's fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%. The transaction qualifies as for accounting as a cash flow hedge. What is the total amount that will be recognized in other comprehensive income in the year ended 6/30/X2?

In the accounting for forward exchange contracts, gains and losses are measured using either spot or forward rates. Which of the following statements concerning measurement of gains and losses is true?

Gains and losses resulting from a derivative instrument used for a cash flow hedge are recognized in current earnings:

On November 1, 20X1, a U.S. company sold merchandise to a foreign firm for 100,000 FC with payment to be made on January 31, 20X2, in FC. To hedge against fluctuations in exchange rates, the firm also entered into a forward exchange contract on November 1, 20X1 to sell 100,000 FC on January 31, 20X2. The U.S. firm has a December 31 year end for accounting purposes. The following exchange rates may apply: Discount rate = 10% Required: Make all the necessary journal entries for the U.S. firm relative to these events occurring between November 1, 20X1, and January 31, 20X2.

A United States based company that has not hedged an exposed asset position would experience an exchange gain if

Which of the following does not represent an exchange risk on an exposed position to a company transacting business with a foreign vendor?

Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on 6/1/X9 for 80,000 foreign currency units, to be paid on 9/1/X9. On 6/1/X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on 9/1/X9. Wolters has a July 31 year end. Exchange rates are as follows: The option strike price was $0.645. Required: Make the necessary journal entries for Wolters for the period June 1 through September 1, 20X9.