Deck 14: Accounting for Financial Instruments

Question 1

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $100 000 10% treasury bonds is $3.50.
What was the initial journal entry to record the option?

A) Dr Investment in options contract $\quad\$ 39500$
CrCash at Bank $\quad\$ 39500$
B) Dr Investment in options contract $\quad \$ 3950$
Cr Cash at Bank $\quad\$ 3950$
C) $\begin{array}{lr}\text { Dr } \quad \text { Cash at Bank } & \$ 39500 \\\text { Cr Investment in ootions contract } & \$ 39500\end{array}$
D) $\begin{array} { c c c } \text { Dr } \text { Cash at Bank } & \$ 3950 \\\text { Cr Investment in options contract } & \$ 3950\end{array}$

Answer 1

Dr Investment in options contract $\quad\$ 39500$
CrCash at Bank $\quad\$ 39500$

Question 2

A buyer of a futures contract:

A) may let the contract expire with no action required
B) has an obligation to buy the underlying asset
C) has a right, but not an obligation, to buy the underlying asset
D) must pay the futures price when the contract is made

Answer 2

B

Question 3

Which of the following is not one of the five categories of financial instrument?

A) Held to maturity investments
B) Hedging instrument
C) Loans and receivables
D) Financial assets or financial liabilities at fair value through profit or loss

Answer 3

B

Question 4

The buyer of a put option on shares:

A) obtains the right to sell the shares at an agreed future time at their market price at that time
B) must sell the shares at an agreed future time at a price determined now
C) obtains the right to sell the shares at an agreed future time at a price determined now
D) must sell the shares at an agreed future time at their market price at that time

Question 5

A trader sells 2 futures contracts (a total value of $50)when the price of the contracts (based on the SPI 200 share price index)is 3030.When these contracts expire,the index itself is at 3015 points and the price of the SPI 200 contract units is 2995.The trader has:

A) made a gain of $1750
B) made a loss of $1750
C) made a loss of $875
D) made a gain of $875

Question 6

The reasons for the use of financial instruments such as futures contracts,options and swaps include all of the following except:

A) to provide 'off-balance-sheet' financing opportunities
B) to reduce the amount of outstanding accounts receivable
C) to assist in the management of interest rate and foreign currency exchange risks
D) to enable the raising of funds by businesses

Question 7

A futures contract provides for:

A) a purchase or sale now at a price to be determined based on future events
B) a purchase or sale in the future at a price to be determined when the transaction is completed
C) a purchase or sale in the future at a fixed price agreed at the date of the agreement
D) any of the above

Question 8

Financial instruments include accounts receivable,accounts payable,futures contracts,equity securities and options.Which of the following statements is correct?

A) Accounts receivable, accounts payable and options are primary financial instruments
B) Equity securities and futures contracts are primary financial instruments
C) Accounts receivable and accounts payable are derivative (secondary) financial instruments
D) None of the above is correct

Question 9

A futures contract can be arranged:

A) only on financial measures such as stock market price indices
B) only through an established stock exchange
C) only on commodities such as agricultural products
D) on virtually any commodity or financial measure

Question 10

Which of the following best describes the difference between a simple financial instrument and a compound financial instrument?

A) A simple financial instrument consists of only one financial asset/financial liability/equity instrument while a compound financial instrument contains both a liability and an equity element
B) A simple financial instrument accrues interest using simple interest formula while the compound financial instrument calculates interest on the compound formula
C) The fair value of a simple instrument is calculated quarterly while the fair value of a compound instrument accrues daily
D) A simple financial instrument has a less complex fee structure

Question 11

SPI 200 futures contracts:

A) cease trading on the third Thursday of the contract month
B) are settled on the third Thursday of the contract month
C) may only be used by traders
D) all of the above

Question 12

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $100 000 10% treasury bonds is $3.50.
What would be the journal entry for 30 June 2010?

A) Dr Loss on options contract $\quad \$ 4500$
$\mathrm { Cr }$ Investment in options contract $\quad\$ 4500$
B) $\begin{array} { l l l } \text { Dr Loss on options contract } & \$ 450 & \\\text { Cr Investment in options contract } & & \$ 450\end{array}$
C) Dr Investment in options contract $\quad \$ 4500$
$\mathrm { Cr }$ Gain on options contract $\quad\$ 4500$
D) Dr Investment in options contract $\quad \$ 450$
$\mathrm { Cr }$ Gain on options contract $\quad\$ 450$

Question 13

Explain the respective rights and obligations of:
(a)the buyer of a call option over shares
(b)the writer (seller)of a call option over shares
(c)the buyer of a put option over shares
(d)the writer (seller)of a put option over shares

Question 14

A trader purchases 4 futures contracts with a total value of $100 when the price of the contracts (based on the SPI 200 share price index)is 3026.When these contracts expire,the index itself is at 2950 points and the price of the SPI 200 contract units is 2975.The trader has:

A) made a gain of $5100
B) made a loss of $5100
C) made a loss of $2550
D) made a gain of $2550

Question 15

A futures exchange clearing house is mainly concerned with:

A) calling in margins from traders as and when required
B) establishing and collecting deposits from brokers trading on the exchange
C) calculating the gains and losses made by futures traders
D) all of the above

Question 16

Which of the following statements is correct?

A) The writer (seller) of a call option on shares receives a fee from the buyer of the option
B) The writer (seller) of a call option on shares may or may not have to sell the shares to the buyer of the option
C) The writer (seller) of a call option on shares has an obligation to sell the shares at a future time to the buyer of the option
D) All of the above are correct

Question 17

AASB 139 requires that,subsequent to initial recognition,financial liabilities other than those designated as at fair value through profit and loss must be measured at amortised cost using the:

A) effective interest method
B) nominal interest method
C) simple interest method
D) compound interest method

Question 18

An 'interest rate swap' generally involves:

A) a lender and a borrower agreeing to change a floating interest rate to a fixed interest rate or vice versa
B) two (or more) parties exchanging floating interest rates for fixed interest rates on loans
C) two (or more) parties agreeing to guarantee each others' loan obligations
D) two (or more) parties in different countries agreeing to deal at fixed currency exchange rates

Question 19

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $$\$ 100000$$ 10% treasury bonds is $3.50.On 31 July 2010,Corine Ltd sold the option for $4.00.What are the journal entries to record this transaction?

A) $\begin{array} { l r r } \text { Dr Cash at Bank } & \$ 40000 & \\\text { Cr Gain on options contract } & \$ 5000 \\\text { Cr Investment in options } & \$ 35000\end{array}$
B) $\begin{array} { l r r } \text { Dr Cash at Bank } & \$ 40000 & \\\text { Cr Gain on options contract } & \$ 500 \\\text { Cr Investment in options } & \$ 39500\end{array}$
C)C) Dr Investment in options $\quad\$ 35000$
Dr Loss on options contract $\quad\$ 5000$
Cr Cash at Bank $\quad\$ 40000$
D) $\begin{array} { c r r } \text { D) Dr Investment in options } & \$ 39500 & \\\text { Dr Loss on options contract } & \$ 500 & \\\text { Cr Cash at Bank } & & \$ 40000\end{array}$

Question 20

A 'hedging' financial instrument can:

A) protect against losses from adverse movements in foreign exchange rates
B) eliminate any possible gain from changes in the Australian dollar/US dollar exchange rate
C) offset the risk of loss from adverse commodity price changes
D) do all of the above

Question 21

Identify and explain the methods required under AASB 139 to account for a futures contract both at its inception and for subsequent changes in its fair value.

Question 22

Discuss the disclosure requirements in AASB 7 Financial Instruments Disclosure and AASB 132 Financial Instruments Presentation.

Question 23

What is meant by an 'interest rate swap'? Illustrate your answer with a simple example of how such a swap operates and how it would affect the parties concerned.Why might businesses engage in an interest rate swap?