Question 1

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 2

Under U.S. GAAP, foreign exchange losses should be recorded by:

Accepted Answer

A)  debiting "Foreign Exchange Loss". 
B)  crediting "Foreign Exchange Loss". 
C)  debiting "Retained Earnings". 
D)  debiting "Sales Revenue".

Question 3

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 4

Under U.S. GAAP, 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 5

What has occurred when one company purchases the right to buy a foreign currency sometime in the future at an exchange rate quoted today?

Accepted Answer

A)  The company has acquired a call option. 
B)  The company has entered a forward contract. 
C)  The currency has appreciated relative to the dollar. 
D)  The company has acquired a put option.

Question 6

According to the World Trade Organization, what was the size of international trade in 2016?

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)  $12,000,000,000,000 (12 trillion dollars)

Question 7

What is foreign exchange risk exposure?

Accepted Answer

A)  The possibility of a loss because of changes in the value of a foreign currency 
B)  Losses caused by paying for purchased goods in a foreign currency 
C)  Losses caused by receiving payment in a foreign currency for goods sold 
D)  All of the above

Question 8

What is a "foreign exchange rate?"

Accepted Answer

A)  The price to buy a foreign currency 
B)  The price to buy foreign goods 
C)  The difference between the price of goods in a foreign currency and the price in a domestic currency 
D)  The cost to hold all monetary assets in a single currency

Question 9

On December 1, 2001 Pimlico made sales to a customer in India and recorded Accounts Receivable of 10,000,000 rupees. The customer has until March 1, 2002 to pay. On December 1, 2001, Pimlico paid $500 for a put option to sell rupees at a strike price of $2.30 per 100 rupees on March 1, 2002, which was the spot rate on December 1, 2001. On December 31, 2001, the spot rate was $2.80 per 100 rupees and the option premium was $0.004 per 100 rupees. What is the fair value of the option on December 1, 2001?

Accepted Answer

A)  $0 
B)  $500 
C)  $400 
D)  $10,000

Question 10

What kind of exposure exists for foreign currency firm commitments?

Accepted Answer

A)  Fair value exposure 
B)  Cash flow exposure 
C)  Both fair value exposure and cash flow exposure 
D)  Neither fair value exposure nor cash flow exposure

Question 11

On May 1, 2001, Ustar purchased a put option to sell £50,000 on April 30, 2002 at a strike price equal to $2, which was the spot rate on May 1, 2001. Ustar paid a premium of $0.01 per pound. How should the option be recorded on May 1, 2001?

Accepted Answer

A)  Debit Foreign Currency Option for $100,500. 
B)  Credit Foreign Currency Option for $100,500. 
C)  Debit Foreign Currency Option for $500. 
D)  Debit Hedge Expense for $500.

Question 12

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 13

What is a "strike price?"

Accepted Answer

A)  The exchange rate that is used to buy a foreign currency today 
B)  The price that will be paid for goods in a forward contract 
C)  The exchange rate that will be used if a foreign currency option is executed 
D)  The difference between the wholesale rate and the retail rate for foreign currency exchange

Question 14

Under U.S. GAAP, which of the following conditions must be met to qualify for hedge accounting?

Accepted Answer

A)  There must be formal documentation of the hedging relationship. 
B)  A derivative must be used specifically to hedge fair value exposure or cash flow exposure. 
C)  The hedge must be effective. 
D)  All of the above must be met in order to qualify for hedge accounting.

Question 15

Under U.S. GAAP, what method of amortizing discounts or premiums on forward contracts must be used?

Accepted Answer

A)  Weighted average method or accelerated method 
B)  Sum of digit method only 
C)  Effective interest rate method or straight line method 
D)  Straight line method only

Question 16

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 17

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 18

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 19

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 20

For an upcoming trip, Pat wants to buy Euros at the local bank when the current exchange rate quoted on OANDA.com was $1.563 per €1. What should Pat plan to pay for €1,000?

Accepted Answer

A)  exactly $1,563 
B)  more than $1,563 
C)  about $640 
D)  less than $640

Exam 6: Foreign Currency Transactions and Hedging Foreign Exchange Risk