Exam 14: Using Derivatives to Manage Foreign Currency Exposures

_____ On 1/1/06, Optux purchased a 1-year at-the-money FX put option from an FX trader involving 2,000,000 Australian dollars at a cost of $6,000. The exercise price was $.65. The option was obtained to hedge a potential loss of export sales to Australia in the event that the U.S. dollar strengthened. For the first half of 2006, Optux's export sales to Australia were 600,000 Australian dollars lower as a result of the U.S. dollar strengthening. For the last six months of 2006, export sales to Australia are expected to be 400,000 Australian dollars lower as a result of anticipated continued strengthening of the U.S. dollar. At 6/30/06, the direct spot rate was $.70 and the option's market value was $106,000. What amount is reported in Other Comprehensive Income at 6/30/06?

_____ Hedging a firm commitment is a

_____ In a hedge of a firm purchase commitment using an FX forward, how should FX gains and losses occurring during the exposed liability position period be reported?

In a derivative, the party that is in a payable position has both _________________________________ risk and ________________________________ risk.

_____ Hedging which of the following would be a strategic or competitive exposure?

Reporting in the balance sheet the fair value of the net position of the obligations of each party to an FX forward is mandatory under U.S. GAAP.

_____ Which of the following is not a unique "contractual element" of forward-based derivative financial instruments?

On 11/16/06, Expox entered into a 60-day FX forward to hedge 1,000,000 pounds owed from a British customer. Direct exchange rates for the pound are as follows: xpox received payment from the British customer on 1/15/07 via a bank wire transfer. Required: a. Prepare all journal entries relating to the FX forward over the contract's life. b. Prepare the journal entry to record the collection of the receivable from the British customer.

In a derivative, credit risk and liquidity risk are the "opposite sides of the same coin."

Hedging a domestic company's budgeted export sales is a strategic hedge.

In a derivative, the major concern is credit risk.

The issue of split accounting emcompasses

Split accounting is not a possibility for FX options.

Hedging a domestic company's budgeted export sales is a hedge of a forecasted transaction.

Any portion of a derivative's FX gain that is determined to be ineffective must be reported currently in earnings.

_____ In an FX forward entered into for hedging an exposed receivable, the exporter (from a dollar perspective) has

Hedging a firm commitment is a cash flow hedge.

Split accounting encompasses both (1) the manner of _________________________ a derivative and (2) the manner of _____________________________ the change in a derivative's carrying value.

Hedging a foreign currency payable is protecting against the loss of a forecasted transaction.

In a derivative, the party that is in a receivable position has both _________________________________ risk and ________________________________ risk.