CHAPTER 32 – DERIVATIVES (Forward, Futures, Option, Exchange Rate)

1. Fairy Tail operates a chain of seafood restaurants. On January 1, 2018. Fairy Tail
determined that it will need to purchase 150,000 kilos of squid on February 1, 2019.
Because of the volatile fluctuation in the price of squid, on January 1, 2018. Fairy Tail
negotiated a forward contract with the Sabertooth for Fairy Tail to purchase 150,000 kilos
of squid on February 1, 2019 at a price of P95 per kilo. This forward contract was
designated as a cash flow hedge.

On December 31, 2018 and February 1, 2019 the market price of squid per kilo is P80.
The appropriate discount rate is 6% and the present value of 1 at 6% for one period is
.943.

What amount should be recognized by Fairy Tail as derivative asset or liability on

December 31, 2018?

a. 1,980,000 asset
b. 2,250,000 asset
c. 1,980,000 liability
d. 2,250,000 liability

2. Celestial Company requires 25,000 pounds of copper each month in its operation. To
eliminate the price risk associated with copper purchases, on December 1, 2017. Celestial
entered into a futures contract as a cash flow hedge to buy 25,000 pounds of copper on
June 1, 2018. The futures price is P50 per pound.
The futures contract is managed through an exchange, so Celestial does not know the
other party on the other side of the contract. As with most derivative contracts, the futures
contract is settled by an exchange of cash on June 1, 2018 based on the price of copper on
the date.
The market price per pound is P45 on December 31, 2017 and P42 on June 1, 2018. What
is the derivative asset or liability on December 31, 2017?

a. 125,000 asset
b. 125,000 asset
c. 200,000 liability
d. 200,000 liability
3. Vines Company produces colorful 100% cotton T-shirts that are very popular among
teens. The entity uses 170,000 kilos of cotton each month in its production process. In
accordance with the entity’s long-term planning, the entity normally procures one month
supply of cotton to be used in its production process. On December 31, 2015, Vines
Company purchased a call option as a cash flow hedge to buy 170,000 kilos of cotton on
July 1 ,2016. The call option price is P40 per kilo. The entity paid P60,000 for the call
option. The market price of cotton on July 1, 2016 is P43 per kilo. What amount should
be recognized by Vines Company as gain on call option?

a. 510,000
b. 850,000
c. 450,000
d. 570,000

4. On January 1, 2018, Boom Boom Company sold some limited edition shoes to Pow
Company for ¥47,850,000 to be paid on March 1, 2018. The current exchange rate on
January 1, 2018 was ¥110=$1, so the total payment at the current exchange rate would be
equal to $435,000. Boom Boom entered into a forward with a large bank to guarantee the
number of dollars to be received. According to the terms of the contract, if ¥47,850,000
is worth less than $435,000, the bank will pay the difference in cash. Likewise, if
¥47,850,000 is worth more than $435,000, Boom Boom must pay the bank the difference
in cash. The exchange rate on February 28, 2018 is ¥123=$1.

What amount in U.S. Dollars will Boom Boom report as derivative asset or liability on
March 1, 2018?

a. 389,024.39 asset
b. 389,024.39 liability
c. 45,975.61 asset
d. 45,975.61 liability