Question 1

Explain how the risks differ for holders and writers of foreign exchange options. Additionally, describe the difference between American and European options. Finally, how is the intrinsic value of an option calculated?

Accepted Answer

The answer of Explain how the risks differ for holders...

Question 2

Wild, Inc. sold merchandise for 500,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. Exchange rates to purchase 1 foreign currency unit are as follows:  In the year in which the sale was made, 20X5, what amount should Wild report as foreign exchange gain/loss from this transaction?

Accepted Answer

A)  $25,000 
B)  $20,000 
C)  $5,000 
D)  $0

Question 3

On November 1, 20X2, a calendar-year investor purchased a 90-day forward contract to buy 1,000 FCs at a forward rate of 1 FC = $1.01, when the spot rate was 1 FC = $1.00. On December 31, 20X2, the forward rate for a 30-day forward contract was 1 FC = $1.02. On February 1, 20X3, when the spot rate was 1 FC = $1.03, the investor paid the broker and received the foreign currency.
Required:
Prepare the entries necessary to record this information. Ignore the present value calculations.

Accepted Answer

The answer of On November 1, 20X2, a calendar-year investor...

Question 4

On January 1, 20X1, a domestic firm agrees to sell goods to a foreign customer, with delivery to be made on March 1, 20X1. The goods, valued at 50,000 FCs, are to be paid for 30 days after delivery. On January 1, 20X1, the domestic firm purchased a 90-day forward contract to sell 50,000 FCs. Exchange rates on selected dates are as follows:
Discount rate = 10%
  Required:
Prepare the journal entries needed to properly reflect the sales transaction and the forward exchange contract. The forward contract meets the conditions necessary to be classified as a hedge on an identifiable foreign currency commitment. Include the table to calculate the split between exchange gains or losses on the contract due to changes in spot rates and the changes in time value.

Accepted Answer

The answer of On January 1, 20X1, a domestic firm...

Question 5

Happ, Inc. agreed to purchase merchandise from a British vendor on November 30, 20X3. The goods will arrive on January 31, 20X4 and payment of 100,000 British pounds is due February 28, 20X4. On November 30, 20X3, Happ signed an agreement with a foreign exchange broker to buy 100,000 British pounds on February 28, 20X4. Exchange rates to purchase 1 British pound are as follows:  Because of this commitment hedge, Happ, Inc. will record the merchandise at what value when it arrives in January?

Accepted Answer

A)  $165,000 
B)  $164,000 
C)  $160,000 
D)  $159,000

Question 6

Lion Corporation, a U.S. firm, entered into several foreign currency transactions during the year. Determine the effect of each transaction on net income for that current accounting year only. Bear has a June 30 year end.
Required:
a.
On January 15, Lion sold $30,000 (Canadian) in merchandise to a Canadian firm, to be paid for on February 15 in Canadian dollars. Canadian dollars were worth $0.85 (U.S.) on January 15 and $0.82 (U.S.) on February 15.
b.
On June 1, Lion purchased and received a computer costing 100,000 euros from a German firm. Bear paid for the computer on August 1. On June 1, to reduce exchange risks, Lion purchased a contract to buy 100,000 marks in 60 days. Exchange rates are as follows:
  Discount rate = 6% 
c.
On June 1, Lion purchased an option to sell 100,000 FC in 60 days to hedge a forecasted sale to a customer. The option sold for a premium of $6,500 and a strike price of $1.20. The value of the option 6/30 was $12,500. The spot rate on June 1 was $1.19 and $1.25 on June 30.

Accepted Answer

The answer of Lion Corporation, a U.S. firm, entered into...

Question 7

Scenario 10-1
On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows:
  The American firms fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%.
-Refer to Scenario 10-1. What is the value of the Forward Contract Receivable-FC on 6/1/X2?

Accepted Answer

A)  $73,000 
B)  $74,000 
C)  $68,000 
D)  $70,000

Question 8

The accounting treatment given a cash flow hedge of a forecasted transaction continues unless:

Accepted Answer

A)  The hedging relationship is no longer highly effective based on management policies. 
B)  The derivative instrument is sold, terminated, or exercised. 
C)  The derivative instrument is no longer designated as a hedge on a forecasted transaction. 
D)  all of these statements are true.

Question 9

Blue & Green, Inc. purchased merchandise for 100,000 FC from a foreign vendor on December 1, 20X5. Payment in FC is due January 31, 20X6. On December 1, 20X5, Blue & Green signed an agreement with a foreign exchange broker to buy 100,000 FC on January 30, 20X6. Exchange rates to purchase 1 FC are as follows:
 $$\begin{array} { l c c } 
\text { Date } & \text { Spot Rate } & \text { Fwd Rate } \
\hline 12 / 1 / \mathrm { X } 5 & \$ 1.45 & \$ 1.40 \
12 / 31 / \mathrm { X } 5 & \$ 1.43 & \$ 1.35 \
1 / 31 / \mathrm { X } 6 & \$ 1.41 & \$ 1.41
\end{array}$$ Fiscal Year End is 12/31; Discount rate = 12%
Required:
Prepare the journal entries for December 1 through January 31 related to the events described above.

Accepted Answer

The answer of Blue & Green, Inc. purchased merchandise for...

Question 10

Which of the following factors influences the spread between forward and spot rates?

Accepted Answer

A)  which currency is denominated as the domestic currency 
B)  the length of the forward exchange contract 
C)  the current cross rate between the two currencies 
D)  all are factors that may influence the spread

Question 11

On January 1, 20X1, a U.S. firm bought a truck from a foreign firm for 10,000 FCs, to be paid on March 1 in FCs. The spot rate was 1 FC = $1.25 on January 1 and 1 FC = $1.265 on March 1. To protect themselves from exchange rate changes, the U.S. firm entered into a forward exchange contract on January 1 to buy FCs on March 1 for $1.28.
Required:
Make all the necessary journal entries to record the transactions for the U.S. firm on January 1 and March 1.

Accepted Answer

The answer of On January 1, 20X1, a U.S. firm...

Question 12

Wolters Corporation is a U.S. corporation that purchased 50,000 chocolate bars from a foreign manufacturer on March 1, 20X9 for 80,000 foreign currency units, to be paid on April 30, 20X9. On March 1, 20X9 Wolters also entered into a forward contract to purchase 80,000 foreign currency units on April 30, 20X9. Wolters has a December 31 year end.
Exchange rates are as follows:
 $$\begin{array} { l c c } 
\text { Date } & \text { Spot Rate } & \text { Forward Rate } \
\hline 3 / 1 / \mathrm { X } 9 & \$ 0.69 & \$ 0.65 \
3 / 31 / \mathrm { X } 9 & \$ 0.61 & \$ 0.65 \
4 / 30 / \mathrm { X } 9 & \$ 0.66 & \$ 0.66
\end{array}$$ Required:
Prepare the journal entries to record the transactions through April 30, 20X9. March 31 is NOT a fiscal period end. Ignore the split between spot gain/loss and time value.

Accepted Answer

The answer of Wolters Corporation is a U.S. corporation that...

Question 13

Which of the following statements is not true regarding forward contracts that cover periods of time different from the settlement period (transaction date to the settlement date)?

Accepted Answer

A)  If the forward contract expires before the settlement date, the gain or loss will partially offset the gain or loss on the foreign currency transaction. 
B)  If the forward contract expires after the settlement date, post-settlement date gains and losses are not recognized as components of current operating income. 
C)  Premium and discount are amortized over the life of the contract. 
D)  All of these statements are true.

Question 14

A U.S. company that has sold its product to a German firm would be exposed to a net exchange gain on the unpaid receivable if the

Accepted Answer

A)  amount to be paid was denominated in dollars. 
B)  dollar weakened relative to the Euro and the Euro was the denominated currency. 
C)  dollar strengthened relative to the Euro and the Euro was the denominated currency. 
D)  U.S. company purchased a forward contract to buy Euros.

Question 15

On 7/1, a company forecasts the purchase of 10,000 units of inventory from a foreign vendor. The forecasted cost is estimated to be 150,000 FC. It is estimated inventory will be delivered 11/1. Also, on 7/1, the company purchased a call option to buy 150,000 FC at a strike price of $0.60 anytime during October. An option premium of $1,000.
 $\begin{array}{lcccc} 
& \text { July 1 } & \text { July 31 } & \text { August 31 } & \text { October 1 } \
\text { Spot } & \$ 0.58 & \$ 0.61 & \$ 0.63 & \$ 0.635 \
\text { FV of Option } & \$ 1,000 & \$ 1,400 & \$ 2,400 & \$ 2,600
\end{array}$ Required:
Prepare the journal entries required through 10/1.

Accepted Answer

The answer of On 7/1, a company forecasts the purchase...

Question 16

For a hedge on an exposed position, describe the process of valuing the forward contract as of the fiscal period end date.

Accepted Answer

The answer of For a hedge on an exposed position,...

Question 17

On January 1, 20X4, Branson Company, a U.S. corporation, purchased lab equipment from a Japanese vendor for 1,000,000 FC. The 1,000,000 FC is to be paid on March 31, 20X4. On February 1 the company purchased a forward contract to buy foreign currency which would expire on March 31, 20X4. The contract was to purchase 1,000,000 FC.
Exchange Rates are as follows:
  Discount rate = 15%
Required:
Prepare the entries to record the transactions.

Accepted Answer

The answer of On January 1, 20X4, Branson Company, a...

Question 18

Scenario 10-1
On 6/1/X2, an American firm purchased a inventory costing 100,000 Canadian Dollars from a Canadian firm to be paid for on 8/1/X2. Also on 6/1/X2, the American firm entered into a forward contract to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The exchange rates were as follows:
  The American firms fiscal year end is 6/30/X2. The changes in the value of the forward contract should be discounted at 8%.
-Refer to Scenario 10-1. What is the value of the Forward Contract Receivable-FC on 6/30/X2?

Accepted Answer

A)  $75,000 
B)  $75,693 
C)  $74,693 
D)  $74,993

Question 19

A bank dealing in foreign currency tells you that the foreign currency will buy you $.80 US dollars. The bank has given you

Accepted Answer

A)  a direct quote. 
B)  an indirect quote. 
C)  the official (fixed) rate. 
D)  a forward rate.

Question 20

Which of the following statements is true concerning forward contracts classified as hedges of an identifiable foreign currency commitment?

Accepted Answer

A)  Forward contracts used as hedges cannot exceed the foreign currency commitment. 
B)  Forward contracts cannot extend for a time period after the transaction date of the commitment. 
C)  The gain or loss traceable to the time period after the transaction date of the commitment should not be deferred. 
D)  None of these statements is true.

Exam 10: Foreign Currency Transactions