Exam 14: Using Derivatives to Manage Foreign Currency Exposures

_____ A domestic company wishes to hedge an FX payable arising from an importing transaction denominated in a foreign currency using an FX forward. Concerning only the hedging transaction, the domestic company will have which of the following accounts if the company (contrary to actual practice) chooses to record the contractual obligations in the general ledger at the inception of the FX forward?

_____ Which of the following statements is false concerning FX options?

On 1/1/06, Forcax purchased an at-the-money foreign currency put option from an FX trader involving 1,000,000 euros at a cost of $14,000. The option expires on 12/31/06 and is exercisable at $.85. The option was (a) obtained to hedge Forcax's budgeted 2006 export sales to Germany and (b) exercised on 12/31/06. For simplicity, assume that the only interim reporting date was 6/30/06, when the option's fair value was $54,000. Actual export sales to Germany for the first six months of 2006 were 400,000 euros. Direct exchange rates for the euro are as follows: Required: Prepare all journal entries relating to the FX option.

Derivative financial instruments are contracts that create ____________________ and ________________________ that meet the definitions of ____________________ and ________________________.

_____ On 8/3/06, Buyox entered into a noncancellable purchase agreement with a British vendor involving a custom-made machine. Buyox took delivery of the machine on 12/1/06 (120 days later). The purchase price was 100,000 pounds, which Buyox remitted to the vendor on l/30/07 (60 days after delivery). Direct exchange rates on the respective dates are as follows: Also on 8/3/06, Buyox entered into a 180-day FX forward to buy 100,000 pounds. What should be the capitalized cost of the equipment?

Split accounting deals solely with the manner of valuing a derivative.

In a derivative, a party cannot have liquidity risk and credit risk simultaneously.

In a fair value hedge, the concern is always that a loss will be incurred on an existing asset or existing liability.

An expected future sale that is not under contract would be considered a forecasted transaction.

_____ In a forward-based derivative, the party in the unfavorable position cannot have which of the following risks?

For certain hedges, FX gains and losses on derivatives can be deferred and reported as assets and liabilities.

In an FX forward to buy a foreign currency, the buyer must make delivery of the foreign currency to the FX dealer at the expiration date.

_____ Which of the following is not a forecasted transaction that could be hedged to prevent a loss on the transaction(s) (as opposed to the potential loss of forecasted transactions)?

All derivatives are valued in the balance sheet at their ________________________.

Not all anticipatory transactions are firm commitments.

Hedge accounting is optional if FX options are used.

In a fair value hedge, any FX gain or loss on an FX forward used to hedge a firm commitment must be deferred until the settlement date.

_____ On 10/22/06, Sellex entered into a 90-day FX forward involving 100,000 British pounds to hedge a firm sales commitment. Sellex shipped the inventory to the customer on l/20/07. Direct exchange rates on the respective dates are as follows: What is the FX gain or loss to be reported in earnings for 2006 income statement on the FX forward?

In a cash flow hedge, amounts initially reported in Other Comprehensive Income are reclassified to earnings when the transaction on the hedged item is consummated (such as the receipt of inventory).

Hedging a domestic company's budgeted export sales is always a hedge of a firm commitment.