Exam 14: Using Derivatives to Manage Foreign Currency Exposures

FX forwards result in a(n) _____________________________ hedge because both the downside risk and the upside potential on the hedged item are ______________________________.

_____ A domestic importer enters into an FX forward to hedge an FX payable on an importing transaction. Concerning these two transactions,

_____ On 1/1/06, Putax purchased a 1-year at-the-money FX put option from an FX trader involving 1,000,000 British pounds at a cost of $8,000. The exercise price was $1.40. The option was obtained to hedge Putax's budgeted 2006 export sales to British customers. Actual export sales to British customers for the first quarter of 2006 were 300,000 pounds. At 3/31/06, the direct spot rate was $l.368 and the option's market value was $38,000. What amount is reported in Other Comprehensive Income at 3/31/06?

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

FX forwards are _________________________________________ in nature.

_____ A company that enters into an FX forward to buy a foreign currency at more than the direct spot rate will have a

In assessing hedge effectiveness, the change in a derivative's carrying value attributable to the change in the derivative's time value element must be used.

On 8/3/06, Salorc obtained a noncancelable sales order from a Norwegian customer for a chip-making machine. The contract price was 1,000,000 Nor-wegian krona. Concurrently, Salorc entered into a 180-day FX forward to sell 1,000,000 Norwegian krona at the forward rate of $.144. Salorc delivered the machinery on 12/1/06 and received payment on 1/30/07 via a bank wire transfer. Direct exchange rates for Norwegian krona are as follows: Required: a. Prepare a partial balance sheet for Salorc at 12/31/06. b. Prepare a partial income statement for Salorc for 2006.

For an FX forward to qualify as a hedge of a firm foreign-currency-denominated commitment, the FX forward must be ____________________________________ as a hedge, be _____________________________________, and the foreign currency commitment must be _____________________________________.

_____ Which of the following is not one of the four types of hedging categories that exist?:

In FX forwards, only one party to the contract must deliver a currency to the other party at the expiration date.

In an FX forward, hedge accounting is accounting for the premiums and discounts separately from the intrinsic value.

_____ A domestic exporter has an FX receivable that is due in 90 days. The exporter wishes to report (a) a gain if the exchange rate changes favorably and (b) no loss if the exchange rate changes unfavorably. If the exporter's policy is to use only FX forwards (and not options), the exporter would

FX gains and losses on cash flow hedges are initially reported in Other Comprehensive Income when they arise.

_____ Derivative financial instruments are contracts that create

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

Hedging a firm commitment is a cash value hedge.

In an FX forward in which a foreign currency is being bought at less than the spot rate, a discount exists.

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

FAS 133 prescribes whether or not the obligations of each party to an FX forward are to be recorded in the general ledger at the inception of the contract.