Question 1

Which of the following statements is true about hedge accounting under U.S.GAAP?

Accepted Answer

A) Companies may choose whether to account for derivatives as cash flow hedges or fair value hedges. 
B) If a derivative qualifies as a cash flow hedge, the hedging instrument is adjusted to fair value on each balance sheet date. 
C) If a derivative is elected by the company not to be designated as a cash flow hedge, it must be accounted for as such. 
D) Hedge accounting is only advantageous when a foreign currency depreciates between the transaction date and the payment date.

Question 2

On November 1, 20x1 Zamfir Company, a U.S. corporation, purchased minerals from a Russian company for 2,000,000 rubles, payable in 3 months. The relevant exchange rates between the U.S. and Russian currencies are given:$\begin{array}{lll} 
& \text { Spot rate } & \text { Forward rate(at February 1,20 x 2) } \
\text { November 1,20 x 1   }  1 & \$ 0.348 & \$ 0.348\
\text {December  31,20 x1 }& \$ 0.359 & \$ 0.352 \
\text { February 1.  20 x 2   } & \$ 0.344 &
\end{array}$ 
-Assume that on November 1, 20x1 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 20x2.What is the fair value of the forward contract on December 31, 20x1?

Accepted Answer

A) $8,000 
B) $7,800 
C) $22,000 
D) $8,200

Question 3

Why must the two-transaction perspective be used for recording foreign currency transactions under U.S.GAAP?

Accepted Answer

A) The two-transaction perspective is required under IFRS. 
B) U.S.GAAP requires conservatism in financial reporting. 
C) All other methods are excessively complicated to use and therefore obscure the essence of the transaction. 
D) Management made two decisions: one to sell and another to extend credit in a foreign currency.

Question 4

What information is needed to determine the fair value of a foreign currency forward contract?

Accepted Answer

A) The forward rate at the date the contract was entered 
B) The current forward rate for a contract that matures on the same dates as the forward contract that was entered into 
C) A discount rate to determine the present value of the contract 
D) All of the above information is needed

Question 5

The number of U.S.dollars ($) today to buy one U.K.pound (£) six months from now is called:

Accepted Answer

A) the spot rate. 
B) the exact rate. 
C) the forward rate. 
D) the prime rate.

Question 6

The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y.What can we conclude about these two currencies?

Accepted Answer

A) Country X is using the Euro. 
B) Country X has pegged its currency to the currency of Country Y. 
C) Country X has an undesirable currency. 
D) Country X allows its currency to float relative to the currency of Country Y.

Question 7

According to the World Trade Organization, what was the size of international trade in 2011?

Accepted Answer

A) $7,000,000,000 (7 billion dollars) 
B) $70,000,000,000 (70 billion dollars) 
C) $37,000,000,000 (37 billion dollars) 
D) $18,000,000,000,000 (18 trillion dollars)

Question 8

A bank exchanging foreign currency makes its profit in what manner?

Accepted Answer

A) On the difference between the spot rate and the foreign rate 
B) A bank is forbidden, by law, to charge a premium in foreign currency exchange 
C) On the present value of the forward rate discounted to the date an option is purchased 
D) On the difference between the buying and selling rates

Question 9

Excel Sources Inc.is a U.S.incorporated company.Due to change in exchange rate, it receives $150,000 as payment against a sale of $165,000.Under the two-transaction perspective:

Accepted Answer

A) no journal entry will be prepared on the date of sale. 
B) the sale will be recorded at $150,000 on the date of sale. 
C) foreign exchange loss will be recorded for $15,000. 
D) Accounts Receivable will be debited for $15,000 on the date of payment.

Question 10

What is the primary difference between a cash flow hedge and a fair value hedge?

Accepted Answer

A) The fair value hedge must completely offset the variability in the cash flow from the foreign currency receivable or payable. 
B) The cash flow hedge can only be used to offset potential foreign currency losses on accounts receivable. 
C) The cash flow hedge must completely offset the variability in cash flow from the foreign currency receivable or payable. 
D) The fair value hedge can only be used to offset the variability in cash flow from long-term fixed assets related to foreign currency fluctuations.

Question 11

Northland Corporation recorded £1,000,000 in Accounts Receivable for sales to customers in the United Kingdom and recorded Accounts Payable of 2,000,000 Yuan for product purchased from China.If Northland recorded a foreign currency exchange loss on its receivables and a foreign currency gain on its payables, what must have happened to each currency?

Accepted Answer

A) Yuan appreciated, Pound depreciated 
B) Yuan depreciated, Pound appreciated 
C) Yuan appreciated, Pound appreciated 
D) Yuan depreciated, Pound depreciated

Question 12

On 1 January, 2015, Hikers Inc., a U.S.-based company, borrowed £200,000 on a two-year note at a per annum interest of 4.5%.The spot rate on this day was $1.65 per pound.The spot rate on 31 December, 2015, was $1.64 per pound.The journal entries to account for this foreign currency borrowing will include:

Accepted Answer

A) a debit to Cash for $200,000 on January 1, 2015. 
B) a credit to Notes Payable for $330,000 on December 31, 2015. 
C) a debit to Foreign Exchange Loss for $90 on December 31, 2015. 
D) a debit to Interest Expense for $14,760 on December 31, 2015.

Question 13

How should discounts or premiums on forward contracts be treated if the derivative is hedging a foreign-currency-denominated asset?

Accepted Answer

A) Carried on the balance sheet until the contract is completed 
B) Included in income in the period the derivative is acquired 
C) Amortized over the life of the forward contract 
D) None of the above

Question 14

What is a foreign currency transaction?

Accepted Answer

A) It is another name for an international transaction. 
B) It is a transaction that involves payment at a date sometime in the future. 
C) It is a business deal denominated in a currency other than a company's domestic currency. 
D) It is an economic event measured in a currency other than U.S.dollars.

Question 15

Which of the following statements is true of the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses?

Accepted Answer

A) In an export sales, depreciation of the foreign currency causes a foreign exchange gain. 
B) In an import purchase, appreciation of the foreign currency causes a foreign exchange gain. 
C) In an import purchase, depreciation of the foreign currency causes a foreign exchange loss. 
D) In an export sales, appreciation of the foreign currency causes a foreign exchange gain.

Question 16

In the years between 1990 and 2001 when global gross domestic product rose 27%, what was the growth in global exports?

Accepted Answer

A) 25% 
B) 75% 
C) 35% 
D) 50%

Question 17

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.
-If the spot rate on March 1, 20x2 was $2.45 per 100 rupees, what is the foreign currency exchange gain or loss that should be recorded that day?

Accepted Answer

A) $15,000 gain 
B) $15,000 loss 
C) $35,000 gain 
D) $35,000 loss

Question 18

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:
$\begin{array}{lll} 
& \text { Spot rate } & \text { Forward rate (to } 4 / 1 / \mathrm{x} 2) \
\text { October } 1,20 \times 1 & \$ 1.87 & \$ 1.85 \
\text { December } 31,20 \times 1 & \$ 1.85 & \$ 1.84 \
\text { April 1.20x2 } & \$ 1.90 &
\end{array}$ 
The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95.
-Assuming that Amazing Corporation does not hedge this transaction, what is the amount of exchange gain or loss that it should show on its December 31, 20x1 income statement?

Accepted Answer

A) Loss $1,000 
B) Loss $2,000 
C) Gain $1,000 
D) Gain $1,900

Question 19

Under International Accounting Standards Board rules, what method is required to account for foreign currency transactions?

Accepted Answer

A) A one-transaction perspective must be used. 
B) The two-transaction perspective must be used. 
C) A sale is not recorded until payment is received and converted to U.S.dollars. 
D) A sale is not recorded until payment is received in the foreign currency.

Question 20

What is "asset exposure" to foreign exchange risk?

Accepted Answer

A) The possibility that an asset denominated in domestic currency will decline in value because of changes in the foreign exchange rate 
B) The possibility that an asset denominated in a foreign currency will change in value because of a change in the foreign exchange rate 
C) The loss resulting from an import purchase when a foreign currency appreciates 
D) The loss resulting from an import purchase when a foreign currency depreciates

Exam 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk