Deck 7: Foreign Currency Transactions and Forward Exchange Contracts

Question 1

A foreign exchange dealer using the direct form of quotation quoted US$1.00 equals A$1.2897/1.4366. What does this represent?

A) A buying rate of A$1.4366 for US$1.00.
B) A buying rate of US$1.2897 for A$1.00.
C) A selling rate of A$0.1.2897 for US$1.00.
D) A bid-ask spread of A$0.1469.

Answer 1

D

Question 2

A realised exchange difference arises:

A) when the exchange rate changes between initial recognition and cash settlement.
B) when the exchange rate changes between initial recognition and end of reporting period.
C) on remeasurement of a monetary liability at the end of the reporting period.
D) on initial recognition of a monetary asset.

Answer 2

A

Question 3

All of the following are examples of a cash flow hedge, except:

A) a forward contract to buy US$ hedging recognised borrowings in US$.
B) a forward contract to buy US$ hedging future interest payments on variable rate debt in US$.
C) a forward contract to sell US$ hedging a highly probable sale of inventory in US$.
D) a forward contract to buy US$ hedging an unrecognised firm commitment to purchase goods in US$.

Answer 3

A

Question 4

The __________ is a hedge of the exposure to the variability in cash flows that is attributable to a particular risk that is associated with all, or some component of, a recognised asset or liability.

A) fair value hedge
B) hedge of a net investment in a foreign operation
C) cash flow hedge
D) all of the above

Question 5

A decrease in the direct rate of US$1 to A$# results in:

A) an increase in US$ amount for a payable in A$.
B) a decrease in A$ amount for a payable in US$.
C) an exchange loss.
D) an increase in A$ amount for receivable in US$.

Question 6

All of the following assets can be defined as 'qualifying assets' except:

A) manufacturing plants.
B) inventories purchased ready for sale.
C) power generation facilities.
D) investment properties.

Question 7

All of the following are foreign currency transactions for a company that has A$ as its functional currency, except:

A) goods sold at prices denominated in Japanese Yen.
B) inventory sold to a customer in Hong Kong who pays in A$.
C) borrowing funds where amounts are payable in NZ$.
D) equipment sold at prices denominated in pounds.

Question 8

At the date of the transaction, a foreign currency monetary item is initially recognised and measured using:

A) the closing rate.
B) the foreign currency monetary value.
C) spot exchange rate.
D) US dollars.

Question 9

The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item, describes:

A) transaction exposure.
B) hedge ineffectiveness.
C) hedge effectiveness.
D) transaction variability.

Question 10

Hedge effectiveness is ascertained from:

A) the hedge ratio of the hedging relationship reflects actual quantities and is consistent with the purpose of hedge accounting.
B) there is an economic relationship between the hedging instrument and the hedged item.
C) the effect of credit risk does not dominate the economic relationship hedging instrument and the hedged item.
D) all of the above.

Question 11

All the following items are 'monetary items' according to AASB 121/IAS 21 except:

A) trade payable of ₤50 000.
B) borrowings €30 000.
C) shares held in BHP Ltd listed on the ASX.
D) trade receivable of US$12 000.

Question 12

Foreign exchange risk may relate to:

A) recognised assets and liabilities.
B) planned foreign currency transactions.
C) unrecognised firm commitments.
D) all of the above.

Question 13

If an Australian company enters a forward exchange contract to buy US$15 000, then which of the following applies?

A) The company's contractual obligation (at the forward rate) and contractual right (at the spot rate) are settled on a net basis.
B) The company has a contractual obligation to deliver foreign currency at the settlement date and that obligation is realised at the spot rate.
C) The company has a contractual right to receive US$15 000 at the settlement date and that right is an asset fixed in A$ at the forward rate.
D) The company's forward contract will act as a hedge against a recognised asset.

Question 14

At the end of the reporting period, a foreign currency monetary item is remeasured using:

A) the foreign currency monetary value.
B) spot exchange rate.
C) US dollars.
D) the closing rate.

Question 15

A forward contact to buy US$40 000 for a planned purchase transaction of US$50 000 has a hedge ratio of:

A) 40%.
B) 125%.
C) 80%.
D) 20%.

Question 16

All of the following are examples of a fair value hedge, except:

A) a forward contract to sell US$ hedging a recognised trade receivable in US$.
B) a forward contract to buy US$ hedging a highly probable purchase of inventory in US$.
C) a forward contract to buy US$ hedging a recognised trade payable in US$.
D) a forward contract to sell US$ hedging a recognised loan receivable in US$.

Question 17

Which exchange rate is used at the end of the reporting period?

A) The indirect rate.
B) The spot rate.
C) The closing rate.
D) The ending rate.

Question 18

AASB 121/IAS 21 requires that the financial report disclose which of the following?

A) The net exchange differences recognised in OCI and accumulated in a separate component of equity.
B) The amount of exchange differences recognised in the profit or loss for the period other than those that relate to financial instruments measured at fair value through profit or loss.
C) Any change in functional currency and reason for change.
D) All of the above.

Question 19

A foreign exchange dealer using the indirect form of quotation has quoted A$1.00 equals US$0.6961/0.7754. What does this represent?

A) A buying rate of US$0.7754 for A$1.00.
B) A selling rate of A$0.7754 for US$1.00.
C) A buying rate of A$0.6961 for US$1.00.
D) A selling rate of US$0.7754 for A$1.00.

Question 20

The formal documentation of a hedging relationship must include identification of: I The hedging instrument
II The hedged item
III The nature of the risk being hedged
IV How the entity will assess hedge effectiveness

A) I, II and III only.
B) I, II and IV only.
C) II, III and IV only.
D) I, II, III and IV.