Question 1

Adjustments to FX forwards at intervening financial reporting dates are ____________________________________ FX gains and losses.

Accepted Answer

The answer of Adjustments to FX forwards at intervening financial...

Question 2

Hedging an investment in a foreign subsidiary is a _______________________ hedge.

Accepted Answer

The answer of Hedging an investment in a foreign subsidiary...

Question 3

_____ Concerning FX forwards, which of the following statements is true?

Accepted Answer

A)  They are customizable only as to duration. 
B)  They are customizable only as to the quantity of currency. 
C)  They are customizable as to both duration and the quantity of currency. 
D)  They are available for the majority of foreign currencies. 
E)  None of the above. 
A)  They are customizable only as to duration. 
B)  They are customizable only as to the quantity of currency. 
C)  They are customizable as to both duration and the quantity of currency. 
D)  They are available for the majority of foreign currencies. 
E)  None of the above.

Question 4

Derivative financial instruments are contracts that create rights but not obligations.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A)  Both on-balance-sheet risk and off-balance-sheet risk can exist simultaneously. 
B)  The market value can change quickly. 
C)  The market value can quickly change from a favorable position to an unfavorable position. 
D)  The market value can quickly change from an unfavorable position to a favorable position. 
E)  None of the above. 
A)  Both on-balance-sheet risk and off-balance-sheet risk can exist simultaneously. 
B)  The market value can change quickly. 
C)  The market value can quickly change from a favorable position to an unfavorable position. 
D)  The market value can quickly change from an unfavorable position to a favorable position. 
E)  None of the above.

Question 6

Hedging a forecasted transaction is generally a __________________________ hedge.

Accepted Answer

The answer of Hedging a forecasted transaction is generally a...

Question 7

In a cash flow hedge, the concern is that an adverse cash flow result will occur on a forecasted transaction.

Accepted Answer

A) True 
 B)False

Question 8

On 12/1/06, Purorc ordered machinery (under a noncancelable purchase order) from a Dutch vendor. The contract price was 1,000,000 euros. Concurrently, Purorc entered into a 60-day FX forward to buy 1,000,000 euros at the forward rate of $.96. Purorc took delivery of the machinery on 12/16/06 and paid the vendor on 1/30/07 via a bank wire transfer. Direct exchange rates for euros are as follows:
   Required:
a. Prepare a partial balance sheet for Purorc at 12/31/06. (Be sure to include the machine as a fixed asset.)
b. Prepare a partial income statement for Purorc for 2006.

Accepted Answer

The answer of On 12/1/06, Purorc ordered machinery (under a...

Question 9

An option to buy is referred to as a "call."

Accepted Answer

A) True 
 B)False

Question 10

_____ A domestic company wishes to hedge an FX receivable arising from an exporting 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?

Accepted Answer

A)  A receivable from the FX trader that is a fixed amount in dollars. 
B)  An FX payable that is a fixed amount in dollars. 
C)  An FX receivable that is a fixed amount in dollars. 
D)  A liability to the FX trader that is a fixed amount in dollars. 
E)  None of the above. 
A)  A receivable from the FX trader that is a fixed amount in dollars. 
B)  An FX payable that is a fixed amount in dollars. 
C)  An FX receivable that is a fixed amount in dollars. 
D)  A liability to the FX trader that is a fixed amount in dollars. 
E)  None of the above.

Question 11

Hedging a firm commitment is generally a __________________________ hedge.

Accepted Answer

The answer of Hedging a firm commitment is generally a...

Question 12

Companies can hedge strategic or competitive exposures.

Accepted Answer

A) True 
 B)False

Question 13

_____ In a derivative, "off-balance-sheet risk" is a component of which of the following risks?

Accepted Answer

A)  Credit risk. 
B)  Liquidity risk. 
C)  Market risk. 
D)  Strategic risk. 
E)  None of the above. 
A)  Credit risk. 
B)  Liquidity risk. 
C)  Market risk. 
D)  Strategic risk. 
E)  None of the above.

Question 14

An option to buy is a(n) _____________________________________. An option to sell is a(n) ____________________________________.

Accepted Answer

The answer of An option to buy is a(n) _____________________________________....

Question 15

FX gains and losses on fair value hedges are reported in ______________________ when they arise.

Accepted Answer

The answer of FX gains and losses on fair value...

Question 16

_____ FX gains and losses on cash flow hedges are reported in earnings when

Accepted Answer

A)  The FX gains and losses arise. 
B)  The transaction on the hedged item is initially recorded. 
C)  The transaction on the hedged item is initially reported in earnings. 
D)  None of the above. 
A)  The FX gains and losses arise. 
B)  The transaction on the hedged item is initially recorded. 
C)  The transaction on the hedged item is initially reported in earnings. 
D)  None of the above.

Question 17

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

Accepted Answer

The answer of _____ In an FX forward entered into...

Question 18

_____ On 11/10/06, Selmax entered into a 60-day FX forward involving 100,000 British pounds to hedge a firm sales commitment. Selmax shipped the inventory on l/9/07. Direct exchange rates on the respective dates are as follows:
  What is the FX gain or loss to be reported in earnings for 2006 on the FX forward?

Accepted Answer

A)  $ -0- 
B)  $3,000 gain. 
C)  $3,000 loss. 
D)  $5,000 gain. 
E)  $5,000 loss. 
A)  $ -0- 
B)  $3,000 gain. 
C)  $3,000 loss. 
D)  $5,000 gain. 
E)  $5,000 loss.

Question 19

_____ On 10/10/06, Selcor entered into a noncancellable sales agreement with a foreign customer to sell a custom-made machine. Selcor delivered the machine on 12/9/06 (60 days later). The sales price was 100,000 LCUs, which Selcor received on 1/8/07 (30 days after delivery). Direct exchange rates on the respective dates are as follows:
  Also on 10/10/06, Selcor entered into a 90-day FX forward to sell 100,000 LCUs. What should be the recorded sales price of the equipment?

Accepted Answer

A)  $240,000 
B)  $242,000 
C)  $243,000 
D)  $244,000 
E)  $245,000 
A)  $240,000 
B)  $242,000 
C)  $243,000 
D)  $244,000 
E)  $245,000

Question 20

_____ On 1/1/06, Callex purchased a 1-year at-the-money FX call option from an FX trader involving 2,000,000 French euros at a cost of $16,000. The exercise price was $.25. The option was obtained to hedge Callex's budgeted 2006 import purchases from French vendors. Actual purchases from French vendors for the first three months of 2006 were 500,000 euros. At 3/31/06, the direct spot rate was $.292 and the option's market value was $96,000. What amount is reported in Other Comprehensive Income at 3/31/06 assuming that Callex has resold 50% of the inventory received in the first quarter?

Accepted Answer

A)  $ -0- 
B)  $20,000 
C)  $60,000 
D)  $70,000 
E)  $80,000 
A)  $ -0- 
B)  $20,000 
C)  $60,000 
D)  $70,000 
E)  $80,000

Exam 14: Using Derivatives to Manage Foreign Currency Exposures

Adjustments to FX forwards at intervening financial reporting dates are ____________________________________ FX gains and losses.

Hedging an investment in a foreign subsidiary is a _______________________ hedge.

_____ Concerning FX forwards, which of the following statements is true?

Derivative financial instruments are contracts that create rights but not obligations.

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

Hedging a forecasted transaction is generally a __________________________ hedge.

In a cash flow hedge, the concern is that an adverse cash flow result will occur on a forecasted transaction.

An option to buy is referred to as a "call."

Hedging a firm commitment is generally a __________________________ hedge.

Companies can hedge strategic or competitive exposures.

_____ In a derivative, "off-balance-sheet risk" is a component of which of the following risks?

An option to buy is a(n) _____________________________________. An option to sell is a(n) ____________________________________.

FX gains and losses on fair value hedges are reported in ______________________ when they arise.

_____ FX gains and losses on cash flow hedges are reported in earnings when

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

Wholly Owned Subsidiaries: at Date of Creation

Wholly Owned Subsidiaries: Postcreation Periods

Partially Owned Created Subsidiaries & Variable Interest Entities

Introduction to Business Combinations

The Purchase Method: at Date of Acquisition-100 Ownership

The Purchase Method: Postacquisition Periods and Partial Ownerships

New Basis of Accounting

Introduction to Intercompany Transactions

Intercompany Inventory Transfers

Intercompany Fixed Asset Transfers & Bond Holdings

Changes in a Parents Ownership Interest, Statement of Cash Flows, & Earnings Per Share

Reporting Segment and Related Information

International Accounting Standards & Translating Foreign Currency Transactions

Translating Foreign Currency Statements: The Current Rate Method

Translating Foreign Currency Statements: The Temporal Method and the Functional Currency Concept

Interim Period Reporting

Securities and Exchange Commission Reporting

Bankruptcy Reorganizations and Liquidations

Partnerships: Formation and Operation

Partnerships: Changes in Ownership

Partnerships: Liquidations

Estates and Trusts

Governmental Accounting: Basic Principles and the General Fund

Governmental Accounting: The Special-Purpose Funds and Special General Ledger

Not-For-Profit Organizations: Introduction and Private Npos

Filters

An option to buy is a(n) _. An option to sell is a(n) .