Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

On December 1, 20x1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 20x2 to pay. On December 1, 20x1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20x2, which was the spot rate on December 1, 20x1. On December 31, 20x1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. -What is the fair value of the option on December 1, 20x1?

What is the intrinsic value of a foreign currency option?

On December 1, 20x1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 20x2 to pay. On December 1, 20x1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20x2, which was the spot rate on December 1, 20x1. On December 31, 20x1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. -What is the foreign currency exchange gain or loss on December 31, 20x1?

On May 1, 20x1, Ustar purchased a put option to sell £50,000 on April 30, 20x2 at a strike price equal to $2, which was the spot rate on May 1, 20x1.Ustar paid a premium of $0.01 per pound.How should the option be recorded on May 1, 20x1?

How should U.S.companies record receivables and payables from international trade that are denominated in foreign currencies?

What is a "foreign exchange rate?"

Amazing Corporation, a U.S. enterprise, sold product to a customer in Wales on October 1, 20x1 for £100,000 with payment required on April 1, 20x2. Relevant exchange rates are: Spot rate Forward rate (to 4/1/2) October 1,20\times1 \ 1.87 \ 1.85 December 31,20\times1 \ 1.85 \ 1.84 April 1.20x2 \ 1.90 The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95. -Assume that Amazing Corporation enters a forward contract on October 1, 20x1 to sell £100,000 six months hence, on April 1, 20x2.How should Amazing Corporation report the forward contract on its December 31, 20x1 financial statements?

What kind of exposure exists for foreign currency firm commitments?

Which of the following statements is true about the Euro?

King's Bank, a British company, purchases market research services from Harris Interactive, a U.S.company.As per the terms of the contract, payment is to be made three months later in U.S.dollars when the report is delivered.How would King's Bank like to see the exchange rate move, assuming it isn't hedging the transaction?

Under U.S.GAAP, which of the following conditions must be met to qualify for hedge accounting?

What term is used for an option with a positive intrinsic value?

When two parties from different countries enter into a transaction:

How is the fair value of a foreign currency option calculated?

On December 1, 20x1 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 20x2 to pay. On December 1, 20x1, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 20x2, which was the spot rate on December 1, 20x1. On December 31, 20x1, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. -What is the fair value of the option on December 31, 20x1?

In hedge accounting, which of the following exposure should be hedged by foreign currency derivative?

Which of the following statements is true of intrinsic value of options?

Under U.S.GAAP, foreign exchange losses should be recorded by:

Under U.S.GAAP, where are changes in the fair value of derivatives reported?

When accounting for forward contracts, what is meant by the term "executory contract"?