Exam 9: Futures, Options and Interest Rate Swaps

On January 1, 2020, a company borrowed $5,000,000 for three years at the prime rate plus 1.2%, adjusted semiannually, when the prime rate was 0.9%. Interest is payable on June 30 and December 31. To hedge against a possible rise in interest rates, on January 1, 2020, the company bought a three-year 2.3% interest rate cap for a total price of $15,000, paid in full immediately. The intrinsic value of the cap was designated as the hedge instrument. The fair value of the cap was $12,000 on June 30, 2020, when the prime rate was 1.3%, and $14,000 on December 31, 2020 when the company closed its books. All income effects of the loan and the cap are reported in interest expense. Required a. Record the interest payment and the $3,000 decline in the value of the cap for the period January 1 to June 30, 2020, and any interest reimbursement by the cap writer. b. Record the interest payment and $2,000 increase in the value of the cap for the period June 30 to December 31, 2020, and any interest reimbursement by the cap writer.

IFRS 9 requires that the change in time value of options used for hedging be reported:

Use the following information to answer bellow questions A firm carries a commodity inventory at a cost of $750,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company's 2020 year-end, 30 days later, the 30-day futures price is $780,000 and the inventory value declined to $779,000. Income effects of the inventory and the futures are reported in cost of goods sold. -How are the futures reported on the company's year-end balance sheet?

Use the following information to answer bellow questions A firm carries a commodity inventory at a cost of $750,000 and plans to sell it in 60 days. Its market value is currently $800,000. To hedge against a decline in value of the commodity, the company sells commodity futures for delivery in 60 days at a price of $800,000. There is no margin deposit. At the company's 2020 year-end, 30 days later, the 30-day futures price is $780,000 and the inventory value declined to $779,000. Income effects of the inventory and the futures are reported in cost of goods sold. -At what amount is the inventory valued on the company's year-end balance sheet?

A company has a loan of $1,000,000 on which it pays the treasury bill rate + 90 bp annually on December 31. On January 1, 2021, the treasury bill rate is 1.3%, and the company enters an interest rate swap whereby it receives the treasury bill rate + 90 bp and pays a fixed rate of 2%. The swap qualifies for hedge accounting, the company has a December 31 year-end, and all income effects of the loan and the swap are reported in interest expense. The company values the swap at the expected future net swap cash flows, discounted at the variable rate. Required a. Is the swap initially recognized as an asset or liability? Explain. b. Prepare the journal entries to record the company's interest expense for 2021. c. On December 31, 2021, the treasury bill rate has fallen to 1%. Is the swap now reported as an asset or liability? Explain. What account reports the gain or loss on the swap, required to revalue it to its new market value?

An IFRS company has 1,000 bushels of soybeans in its inventory and hedges the price risk of this inventory with a short futures contract locking in the selling price of 1,000 bushels of soybeans. As time passes, changes in the value of the inventory are not exactly offset by changes in the value of the futures contract because

Use the following information to answer questions bellow. A company obtains a $1,000,000 variable rate loan on January 1, 2021, at a 2.1% interest rate. The loan is renewable every 3 months, and the interest rate is reset at each renewal. The company hedges against rising interest rates by taking a short futures position in $1,000,000 of 3-month Treasury bills at 99. There is no margin deposit, and the hedge qualifies as a fair value hedge of a firm liability commitment. At the end of 3 months, the Treasury bills sell for 98.2 and the loan renews at 2.9%. The company closes the futures contract and renews the loan. All income effects of the loan and the futures are reported in interest expense. -How much cash does the company receive from or pay to the broker when it closes the futures contract?

Which statement below accurately describes reporting for a cash flow hedge of an inventory purchase?

Which one of the following derivatives and hedging disclosures is required by U.S. GAAP?

When a share of a company's stock is selling for $55.00, a call option on the stock with a strike price of $56.00 is said to be: