Question 1

Larson, Inc. sold merchandise for 600,000 FC to a foreign vendor on November 30, 20X5. Payment in foreign currency is due January 31, 20X6. On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 20X6. Exchange rates to purchase 1 FC are as follows:  What will be the recorded amount of the Forward Contract on November 30, 20X5?

Accepted Answer

A) $894,000 
B) $888,000 
C) $882,000 
D) $0

Question 2

A transaction involving foreign currency will most likely result in gains and losses to the reporting entity if the

Accepted Answer

A) forward exchange contract is selling at a premium. 
B) transaction is denominated and measured in the reporting entity's currency. 
C) transaction takes place in a country with a tiered monetary system. 
D) transaction is denominated in a foreign currency and measured in the reporting entity's currency.

Question 3

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 4

Bulldog Enterprise, a U.S. firm, agreed on February 1, 20X1, to buy gears from a Mexican firm for 75,000 pesos. Delivery is scheduled for May 1, 20X1, with payment due at that time. On February 1, 20X1, Bulldog also acquired a forward contract to buy 75,000 pesos on May 1, 20X1. (The gears represent inventory to the U.S. firm.) Bulldog's year end is March 31.
Required:
Prepare the journal entries necessary for Bulldog Enterprise to record this activity. Assume that the following exchange rates existed:  
Discount rate  
15%

Accepted Answer

The answer of Bulldog Enterprise, a U.S. firm, agreed on...

Question 5

On 6/1/X2, an American firm purchased 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 acquired an option for $1,500 to purchase 100,000 Canadian dollars for delivery on 8/1/X2. The strike price for the option was $0.685. The exchange rates were as follows:  The entry to settle the option will include:

Accepted Answer

A) a credit to Investment in Option of $1,500 
B) a debit to Foreign Currency of $73,000 
C) a credit to cash of $73,000 
D) a credit to Investment in Option of $2,000

Question 6

Which is true of foreign currency forward contracts and foreign currency options?

Accepted Answer

The answer of Which is true of foreign currency forward...

Question 7

Discuss the differences in using an option to hedge a foreign currency risk rather than a forward contract.

Accepted Answer

The answer of Discuss the differences in using an option...

Exam 10: Foreign Currency Transactions

A transaction involving foreign currency will most likely result in gains and losses to the reporting entity if the

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

Which is true of foreign currency forward contracts and foreign currency options?

Discuss the differences in using an option to hedge a foreign currency risk rather than a forward contract.