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Derivatives As Hedging Intrument in Managing Foreign Currency Exposures Theories
Derivatives As Hedging Intrument in Managing Foreign Currency Exposures Theories
3. Which of the following statements is not correct with regard to foreign currency forward contracts?
a. The contract is between an individual buyer and seller
b. The parties do not have to exchange the currency if the exchange rate is not favorable
c. The forward contract can be for any number of currency units
d. The exchange can take place at any time
4. What is the relationship between the foreign currency spot rate and the forward rates?
a. The spot rate is always higher
b. The forward rate is always higher
c. The two rates always start out the same
d. The rates can be different (either can be higher) or they can be the same
5. Which of the following statements is correct with regard to accounting for a foreign currency sale
on credit and an accompanying foreign currency forward contract?
a. Accounting for the change in the value of the accounts receivable at the balance sheet date is
based on the change in the forward exchange rate
b. It is not necessary to account for the accounts receivable because the company has a forward
contract
c. The accounting for the accounts receivable is the same regardless of whether the company
hedges the receivable with a forward contract or not
d. Changes in the fair value of the forward contract are only recognized at the date the accounts
receivable are collected
6. Which of the following statements is correct with regard to accounting for a foreign currency sale
on credit and an accompanying foreign currency forward contract?
a. Accounting for the change in the value of the accounts receivable at the balance sheet date is
based on the difference between the spot rate and the forward rate at that date
b. It is not necessary to recognize the foreign currency forward contract in the financial records at
the date the contract is created
c. It is not necessary to account for the accounts receivable because the company has a forward
contract
d. Changes in the fair value of the forward contract are based on the change in the spot rate
7. Over what time period is a hedge of a foreign currency commitment on a purchase transaction
applicable?
a. From the date of the commitment until the date of settlement
b. From the transaction date until the settlement date
c. From the date of the commitment until the transaction date
d. From the date of the commitment until the balance sheet date
8. Which of the following is not a potential recognition date when a foreign currency commitment exists?
9. Which of the following statements is correct with regard to a foreign currency commitment hedged
with a forward contract?
a. The foreign commitment hedge period ends on the date the underlying transaction is settled
b. The gain or loss on the foreign currency commitment forward contract is offset by losses or
gains pertaining to the sales amount or the recognized asset value at the transaction date
c. The forward contract is valued at the difference between the forward exchange rate and the
spot rate
d. The gain or loss on the forward contract is recognized only on the date of the underlying
transaction
10. Which of the following statements is not correct with regard to forecasted foreign currency
transactions?
a. Management may initiate a hedge with regard to forecasted foreign currency transaction
b. For a forecasted foreign currency transaction to exist, an expectation of a continuing
relationship with a foreign entity must occur
c. Management often prepares budgets based on forecasted foreign currency transactions
d. For a forecasted foreign currency transaction to exist, a contract for a future purchase or sale
must occur
11. When does the change in value of a hedge instrument for o forecasted foreign currency transaction
affect the income statement?
12. Which of the following statements is not correct with regard to a forecasted foreign currency
transaction hedged with a forward contract?
a. The gain or loss due Io fluctuating exchange rates ls initially recognized in other
comprehensive income
b. a journal entry is not required at the time the hedge is established
c. A purchase or sales commitment ls revalued at the date the forward contract is revalued
d. The forward contract must be revalued at the balance sheet date
13. Which of the following statements is not correct with regard to speculative foreign currency
contracts?
a. The gain or loss from a speculative contract is included in other comprehensive income
b. Speculative contracts can be created with forward contracts and option contracts
c. A speculative contract created with a forward contract does not require a journal entry at
establishment while a speculative contract created with on option contract does require a journal
entry at establishment
d. The hedge instrument must be revalued to its fair value at balance sheet dates
14. A forward exchange contract is being transacted at a premium if the current forward rate is:
15. Which of the following factors Influences the spread between forward and spot rates?
16. Foreign currency transactions not involving a hedge should be accounted for using
17. Which of the following does not represent on exchange risk on an exposed position to a company
transacting business with a foreign vendor?
18. On August 1, a Philippine company enters into a forward contract, in which if agrees to buy FC
(foreign currencies) 1, 000, 000 from a bank at a rate of P 1. 495/FC on December 1. Changes in the value
of the forward contract will be reported in other comprehensive income on the balance sheet in which one
of the following situations?
a. The Philippine company has receivables denominated in FCs, with payment to be received on
December 1.
b. The Philippine company sold merchandise to a customer in a foreign country on August 1, and
expects payment of FC 1, 000, 000 on December 1.
c. The Philippine company plans to sell merchandise to a customer in a foreign country on
August 1, with payment of FC 1, 000, 000 expected on December 1
d. The Philippine company plans to purchase merchandise from a supplier in foreign country,
with payment of FC 1, 000, 000 expected to be paid on December 1
19. Exchange gains and losses on a forward exchange contract that covers the same time period as the
transaction which it provides a hedge for should be recognized as
a. An extraordinary item.
b. part of the original sales transaction.
c. income from continuing operations.
d. income from continuing operations, but only if material.
21. Inter-Coastal Company acquired a sixty-day forward contract for 500,000 euros. With respect to that
derivative instrument, the underlying is:
22. How are investments in financial derivatives valued on the balance sheet?
23. On December 1, a Philippine company agrees to buy euros on February 1 at a contract price of
P64.00. The exchange rate for euros declines to P63.50 (Philippine strengthens) between December 1 and
December 31, when the company’s reporting year ends. How is this contract reported on the company’s
year-end balance sheet?
a. In the asset section.
b. in the liability section.
C. As a contra asset.
d. The contract is not reported on the balance sheet.
24. A Philippine company has entered into a forward purchase contract to hedge a reported foreign
currency obligation. If the peso weakens against the foreign currency,
a. the forward contract appears as a current asset on the company's balance sheet.
b. The forward contract's reported value exactly offsets the reported foreign currency obligation,
with no net balance sheet disclosure.
C. the gain on the forward contract adds to other comprehensive Income.
d. the gain on the foreign currency obligation adds to other comprehensive income
25. A Philippine company has euro-denominated receivables that it hedges with a forward sale of euros.
The euro weakens against the Philippine peso. Which statement is true?
a. The gain on the receivables and the loss on the forward are reported on the income statement.
b. The gain on the receivables and the loss on the forward are reported in other comprehensive
income.
c. The loss on the receivables and the gain on the forward are reported on the income statement.
d. The loss on the receivables and the gain on the forward are reported in other comprehensive
income.
26. A Philippine company has payables to suppliers denominated in euros, and hedges these payables
with foreign currency forward purchase contracts. The euro strengthens against the Philippine peso.
Which statement is true?
a. The gain on the payables and the loss on the forward are reported on the income statement.
b. The gain on the payables and the loss on the forward are reported in other comprehensive
Income.
C. The loss on the payables and the gain on the forward are reported on the Income statement.
d. The loss on the payables and the gain on the forward are reported In other comprehensive
income.
27. On July 10, 20x4, a Philippine company with a December 31 year-end enters a forward contract that
locks in the purchase price of won for delivery on August 15. The forward contract hedges a firm
commitment to buy merchandise from a supplier in Korea, with payment denominated in won. The
purchase is made on August 1, 20x4 and payment is made on August 15. The Philippine company sells
the merchandise in September. Where is the value of the firm commitment to purchase reports in the
year-end financial statements for 20x4?
28. To achieve matching of hedge gains and losses against losses and gains on the hedged item,
accounting for qualified hedges of a firm commitments denominated in foreign currency
a. uses hedge accounting for the firm commitment, but not hedge investment
b. uses hedge accounting for the hedge Investment, but not the firm commitment.
c. uses hedge accounting for both the hedge investment and commitment. the firm investment
d. Does not use hedge accounting for either the hedge investment or the firm commitment.
29. On July 10, 20x4, a Philippine company with a December 31 year-end enters a forward contract that
locks in the selling price of won for delivery on August 15. The forward contract hedges a firm
commitment to sell merchandise to a customer in Korea, with payment denominated in won. The sale is
made on August 1, 20x4 and payment is received from the customer on August 15. Where is the value of
the firm commitment to sell reported in the year-end financial statements for 20x4?
30. To achieve matching of hedge gains and losses against losses and gains on the hedged item,
accounting for qualified hedges of forecasted transactions denominated in foreign currency
a. uses hedge accounting for forecasted transaction, but not hedge investment
b. uses hedge accounting for the hedge Investment, but not the forecasted transaction.
c. uses hedge accounting for both the hedge investment and forecasted transaction
d. Does not use hedge accounting for either the hedge investment or the forecasted transaction
31. A Philippine company hedges an anticipated purchase of merchandise from a UK supplier, payment
to be made in pounds. The hedge qualifies as a cash flow hedge of a forecasted transaction. When are
gains and losses on the hedge investment reported on the income statement?
33. On August 1, a Philippine company enters Into o forward contract, In which It agrees to buy
1,000,000 foreign currencies (FC) from a bank at a rate of P1.65 on December 1. Changes In the value of
the forward contract will be reported on the Income statement in which one of the following situations?
a. The Philippine company uses the forward contract to hedge o loan denominated in FC
b. The Philippine company uses the forward contract to hedge a forecasted purchase of
merchandise from a French supplier.
c. The Philippine company uses the forward contract to hedge o planned purchase of commodities
from a foreign supplier.
d. The Philippine company uses the forward contract to hedge an expected acquisition of
commodities from o foreign company.
34. Which of the following situations does not require hedge accounting to match, on the same Income
statement, gains and losses on the hedge with losses and gains on the hedged Item?
35. Hedge accounting ls not used for hedges of remeasured subsidiaries because
36. Jollibee Corporation hedges its Investments In international subsidiaries. The hedge gains and losses
ore reported In other comprehensive income. For the subsidiaries located In foreign countries, which
statement ls true?
37. The functional currency of Jollibee's subsidiaries ls their local currency. Which of the following
investments does not hedge Jollibee’s transaction gains and losses?
38. A Philippine company enters a forward purchase contract for speculative purposes. When are gains
and losses on the hedge investment reported on the income statements?
39. A PFRs company uses the basis adjustment for its cash flow hedges of equipment purchases. when is
the gain or loss from the hedge removed from AOCI (equity reserve)?
a. In o fair value hedge the entity uses a hedging Instrument to hedge against a the fluctuation in
the fair value of the hedged item. The method will be used when the hedged item will be valued
at fair value.
b. In a cash flow hedge the entity uses a hedging instrument to hedge against the fluctuation in the
Canadian dollar value of future cash flows.
c. The gain or loss on the hedging instrument in a cash flow hedge is initially reported in other
comprehensive Income and reclassified to profit and loss when the hedged item affects profit.
d. The gain or loss on the hedging instrument in a fair value hedge is initially recognized in other
comprehensive income and transferred to profit and loss when the hedged item has be revalued
for accounting purposes in accordance with PFRS.
41. PFRS 9 on speculative forward contracts requires that the contract be:
a. revalued using spot rates throughout its life with any gains or losses to be deferred and
amortized as they occur.
b. revalued at fair value throughout its life with any gains or losses to be deferred and amortized
as they occur
c. valued using spot rates throughout its life with gains or losses to be taken into income as they
occur
d. revalued at fair value throughout its life with any gains or losses to be taken into income as
they occur
42. Which of the ff. would NOT be considered a foreign exchange hedge?
a. the placement of large amounts of CANADIAN funds with a bank in Zurich, Switzerland
b. A foreign currency futures contract
c. A foreign currency option contract
d. A forward exchange contract.
43. Which of the ff. statements accurately describes the manner in which transactions must be translated
under PAS 21?
a. All transactions must be translated into the functional currency of the reporting entity
b. All transactions must be converted into the functional currency of the reporting entity
c. All transactions must be converted into the local currency of the jurisdiction where the majority
of the shareholders reside.
d. All transactions may be reported into the currency of the country where the corporation does
the majority of its business.
a. The historical rate is the exchange rate on the date of the transaction and closing date is the
exchange rate at the end rate of the reporting period.
b. The historical date is the exchange rate on the date of the transaction and the closing rate is the
rate on which any hedge transactions mature
c. The spot rate is the rate on the date of transaction and the relevant forward rate is the exchange
rate used at the end of the reporting period.
d. None of the above.
45. The rate charged by the commercial banks for the purchase of any foreign currency (in Canadian
Dollars) on any given day would be based on which of the following?
46. Which of the ff. is NOT currently a cause of fluctuation in foreign exchange rates?
a. Inflation rates
b. The pegging of a currency to the Philippine peso
c. interest rates
d. trade surpluses and deficits
48. The ineffective portion of an FX (foreign currency) gain or loss on a fair value hedge must always be
reported currently in
EARNINGS OCI
a. YES YES
b. YES NO
c. NO YES
d. NO NO
49. The ineffective portion of an FX (foreign currency) gain or loss on a cash flow hedge must always be
reported currently in
EARNINGS OCI
a. YES YES
b. YES NO
c. NO YES
d. NO NO
50. In a forward based derivative, the party in the favorable position cannot have which of the ff. risk?
a. Credit risk
b. Liquidity risk
c. Market risk.
d. Off-balance sheet risk
MULTIPLE CHOICE THEORIES – ANSWERS
1. B 49. B
2. D 50. B
3. B 51. A
4. D 52. C
5. C 53. A
6. B 54. D
7. C 55. D
8. D 56. B
9. B 57. A
10. D 58. B
11. B 59. A
12. C 60. C
13. A 61. C
14. D 62. A
15. B 63.
16. B
17. D
18. D
19. C
20. A
21. B
22. A
23. B
24. A
25. C
26. C
27. D
28. A
29. C
30. B
31. D
32. D
33. A
34. B
35. D
36. A
37. D
38. A
39. C
40. D
41. D
42. A
43. A
44. A
45. C
46. B
47. A
48. B