484464104 Derivatives as Hedging Intrument in Managing Foreign Currency Exposures Theories PDF

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Which of the following statements is not correct with regard to foreign currency hedges? a. They are executory contracts b. They can only be used by large companies c. They manage foreign exchange fluctuation risk d. They establish a fixed exchange rate between currencies A foreign currency forward ...

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1. Which of the following statements is not correct with regard to foreign currency hedges? a. They are executory contracts b. They can only be used by large companies c. They manage foreign exchange fluctuation risk d. They establish a fixed exchange rate between currencies 2. A foreign currency forward contract has which of the following features? a. The exchange of the currency may or may not occur b. The parties to the contract do not know the number of currency units that will be exchanged until the date the forward contract matures c. The parties to the contract must record journal entries at the date the forward contract is established d. The parties to the contract must exchange the currency regardless of the exchange rate on the date the forward contract matures 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? a. Balance sheet date b. Establishment date of hedge c. Transaction date d. Settlement date of hedge 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? a. In the period in which the exchange rate fluctuates b. when the forecasted transaction affects the income statement c. when the forecasted purchase or sale occurs d. the change in value of a hedge instrument for a forecasted foreign currency transaction never affects 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: a. less than the expected spot rate b. greater than the expected spot rate c. less than the current spot rate d. greater than the current spot rate 15. Which of the following factors Influences the spread between forward and spot rates? a. which currency is denominated as the domestic currency b. the length of the forward exchange contract c. the current cross rate between the two currencies d. all are factors that may influence the spread 16. Foreign currency transactions not involving a hedge should be accounted for using a. the one-transaction method b. the two-transaction method c. a hybrid of the one-and two-transaction methods d. either the one or the two-transaction method (allowed by the FASB) 17. Which of the following does not represent on exchange risk on an exposed position to a company transacting business with a foreign vendor? a. Transaction is denominated in foreign currency, settled at a future date b. Firm commitment to purchase inventory to be paid for in foreign currency c. Forecasted foreign currency transaction with a high probability of occurrence d. Firm commitment to purchase inventory denominated in pesos 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. 20. May a derivative instrument be a Financial Instrument a. Yes b. Yes c. No d. No

Other Contracts Yes No Yes No

21. Inter-Coastal Company acquired a sixty-day forward contract for 500,000 euros. With respect to that derivative instrument, the underlying is: a. The euro currency b. The forward rate c. 500,000 euros d. The Philippine peso amount of the contract 22. How are investments in financial derivatives valued on the balance sheet? a. Market value c. Lower of cost or market value b. Cost d. Not reported 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? a. asset or liability on the balance sheet b. Increase or decrease In other comprehensive Income c. adjustment to sales revenue d. Adjustment to cost of goods sold 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? a. asset or liability on the balance sheet b. Increase or decrease In other comprehensive Income c. adjustment to sales revenue d. Adjustment to cost of goods sold 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? a. when the company takes delivery of the merchandise b. when the company pays for the merchandise c. as the market value of the hedge investment changes d. when the company sells the merchandise 32. A Philippine company hedges an anticipated sale of merchandise to a UK supplier, payment to be received 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? a. when the customer pays for the merchandise b. when the anticipated sale becomes a firm commitment c. as the market value of the hedge investment changes d. when the company reports sales revenue on the sale 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? a. Hedge of a purchase order denominated In another currency b. Hedge of an Investment in a remeasured subsidiary c. Hedge of a forecasted transaction denominated In another currency d. Hedge of a sales order denominated In another currency 35. Hedge accounting ls not used for hedges of remeasured subsidiaries because a. It ls specifically prohibited In PFRS 9. b. The hedges do not meet the strict requirements for effective hedges. c. there ls no risk to hedge. d. Normal accounting matches gains and losses In the same period. 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? a. Jollibee's can hedge its Investments with foreign currency-denominated borrowings. b. Jollibee's remeasures the accounts of these subsidiaries before consolidating them. c. If the foreign currency weakens against the euro, Jollibee's will show translation losses on the subsidiaries. d. If the foreign currency ls expected to strengthen against the euro, Jollibee's will be motivated Io do less hedging of its Investments In subsidiaries 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? a. Put option In the subsidiaries local currency. b. forward sale of local currency. c. long-term debt denominated In the local currency. d Amortized cost denominated In the local currency. 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? a. when the forward contract changes in market value. b. when forward contract is closed c. when the forward contract Is determined to be an effective hedge. d. when the merchandise is sold. 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. When depreciation ls recorded on the equipment. b. When the hedge ls closed. c. when the equipment ls purchased d. when the equipment is sold

40. Which statement is NOT correct? 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. 44. Which of the ff. is correct? 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.

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