Question 1

What kind of exposure exists for recognized foreign currency assets and liabilities?

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 
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 2

On November 1, 2001 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:   The company's incremental borrowing rate provides a discount rate of 0.975 for three months.
If Zamfir does not attempt to hedge this transaction, what is the gain or loss that should be shown on the company's December 31, 2001 financial statements?

Accepted Answer

A)  $22,000 loss 
B)  $21,450 loss 
C)  $8,000 gain 
D)  $7,800 gain 
A)  $22,000 loss 
B)  $21,450 loss 
C)  $8,000 gain 
D)  $7,800 gain

Question 3

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:   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, 2001 income statement?

Accepted Answer

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

Question 4

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

Accepted Answer

A)  The company has purchased a foreign currency option. 
B)  The company has entered a forward contract. 
C)  The currency has been devalued. 
D)  None of the above 
A)  The company has purchased a foreign currency option. 
B)  The company has entered a forward contract. 
C)  The currency has been devalued. 
D)  None of the above

Question 5

Which of the following is done when accounting for a cash flow hedge, but is not done when accounting for a fair value hedge?

Accepted Answer

A)  The hedged asset or liability is adjusted to fair value. 
B)  Foreign exchange gains or losses on the hedged asset or liability are recorded in net income. 
C)  Increases or decreases in a derivative's fair value are recorded in accumulated other comprehensive income. 
D)  Gains or losses resulting from adjusting the fair value of a derivative are recorded in net income. 
A)  The hedged asset or liability is adjusted to fair value. 
B)  Foreign exchange gains or losses on the hedged asset or liability are recorded in net income. 
C)  Increases or decreases in a derivative's fair value are recorded in accumulated other comprehensive income. 
D)  Gains or losses resulting from adjusting the fair value of a derivative are recorded in net income.

Question 6

What term is used for an option with a positive intrinsic value?

Accepted Answer

A)  Put option 
B)  Over the counter 
C)  In the money 
D)  Call option 
A)  Put option 
B)  Over the counter 
C)  In the money 
D)  Call option

Question 7

Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?

Accepted Answer

A)  This was a period when the world economy was very stable. 
B)  There was very little growth in the world economy between 1945 and 1973. 
C)  Countries linked their currency to the U.S. dollar, which was backed by gold reserves. 
D)  Most currencies were pegged to the British pound, which could be converted to sterling silver. 
A)  This was a period when the world economy was very stable. 
B)  There was very little growth in the world economy between 1945 and 1973. 
C)  Countries linked their currency to the U.S. dollar, which was backed by gold reserves. 
D)  Most currencies were pegged to the British pound, which could be converted to sterling silver.

Question 8

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 
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

Question 9

When accounting for forward contracts, what is meant by the term "executory contract"?

Accepted Answer

A)  No cash changes hands 
B)  The CEO of the company is the only one authorized to engage in the contract 
C)  There must be a price paid for the option 
D)  The contract is valid if one of the parties sign it 
A)  No cash changes hands 
B)  The CEO of the company is the only one authorized to engage in the contract 
C)  There must be a price paid for the option 
D)  The contract is valid if one of the parties sign it

Question 10

When two parties from different countries enter into a transaction:

Accepted Answer

A)  the currency to be used for settling the transaction is set by the government. 
B)  a third country's currency must be used to denominate the transaction. 
C)  the two parties are free to decide the currency that should be used to settle the transaction. 
D)  the domestic currency of the buyer must be used to settle the transaction. 
A)  the currency to be used for settling the transaction is set by the government. 
B)  a third country's currency must be used to denominate the transaction. 
C)  the two parties are free to decide the currency that should be used to settle the transaction. 
D)  the domestic currency of the buyer must be used to settle the transaction.

Question 11

A noncancelable sales order that specifies foreign currency price and date of delivery is known as a:

Accepted Answer

A)  hedge. 
B)  foreign currency firm commitment. 
C)  forward contract. 
D)  put option. 
A)  hedge. 
B)  foreign currency firm commitment. 
C)  forward contract. 
D)  put option.

Question 12

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 31, 2001?

Accepted Answer

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

Question 13

What is "hedge accounting?"

Accepted Answer

A)  Any record keeping related to purchase, sale, or valuation of derivatives. 
B)  Recording options and other derivatives on the Balance Sheet. 
C)  Matching gains or losses from hedging with losses or gains from the risk being hedged. 
D)  Using multiple accounting methods to offset the effect of foreign currency exchange. 
A)  Any record keeping related to purchase, sale, or valuation of derivatives. 
B)  Recording options and other derivatives on the Balance Sheet. 
C)  Matching gains or losses from hedging with losses or gains from the risk being hedged. 
D)  Using multiple accounting methods to offset the effect of foreign currency exchange.

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. 
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

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:   The discount factor corresponding to the company's incremental borrowing rate for 6 months is 0.95.
Assume that Amazing Corporation enters a forward contract on October 1, 2001 to sell £100,000 six months hence, on April 1, 2002. How should Amazing Corporation report the forward contract on its December 31, 2001 financial statements?

Accepted Answer

A)  Asset $1,950 
B)  Liability $1,950 
C)  Asset $1,000 
D)  Asset $950 
A)  Asset $1,950 
B)  Liability $1,950 
C)  Asset $1,000 
D)  Asset $950

Question 16

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. 
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 17

On November 1, 2001 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:   The company's incremental borrowing rate provides a discount rate of 0.975 for three months.
Assume that on November 1, 2001 Zamfir Company enters a forward contract to buy 2,000,000 rubles on February 1, 2002. What is the fair value of the forward contract on December 31, 2001?

Accepted Answer

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

Question 18

In hedge accounting, which of the following exposure should be hedged by foreign currency derivative?

Accepted Answer

A)  Temporal exposure 
B)  Fair value exposure 
C)  Derivative exposure 
D)  Forward contract exposure 
A)  Temporal exposure 
B)  Fair value exposure 
C)  Derivative exposure 
D)  Forward contract exposure

Question 19

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 
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 20

How is the fair value of a foreign currency option calculated?

Accepted Answer

A)  By using the Box-Jenkins technique 
B)  Using the modified Black-Scholes pricing model 
C)  Through an arms-length transaction 
D)  Using quotes given daily in the Wall Street Journal 
A)  By using the Box-Jenkins technique 
B)  Using the modified Black-Scholes pricing model 
C)  Through an arms-length transaction 
D)  Using quotes given daily in the Wall Street Journal

What kind of exposure exists for recognized foreign currency assets and liabilities?

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

Which of the following is done when accounting for a cash flow hedge, but is not done when accounting for a fair value hedge?

What term is used for an option with a positive intrinsic value?

Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?

What is "asset exposure" to foreign exchange risk?

When accounting for forward contracts, what is meant by the term "executory contract"?

When two parties from different countries enter into a transaction:

A noncancelable sales order that specifies foreign currency price and date of delivery is known as a:

What is "hedge accounting?"

What is a foreign currency transaction?

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

In hedge accounting, which of the following exposure should be hedged by foreign currency derivative?

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

How is the fair value of a foreign currency option calculated?

Introduction to International Accounting

Worldwide Accounting Diversity

International Convergence of Financial Reporting

International Financial Reporting Standards: Part I

International Financial Reporting Standards: Part II

Translation of Foreign Currency Financial Statements

International Taxation

International Transfer Pricing

Management Accounting Issues in Multinational Corporations

Auditing and Corporate Governance: An International Perspective

International Sustainability Reporting

Filters

Exam 6: Foreign Currency Transactions and Hedging Foreign Exchange Risk

What kind of exposure exists for recognized foreign currency assets and liabilities?

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

Which of the following is done when accounting for a cash flow hedge, but is not done when accounting for a fair value hedge?

What term is used for an option with a positive intrinsic value?

Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?

What is "asset exposure" to foreign exchange risk?

When accounting for forward contracts, what is meant by the term "executory contract"?

When two parties from different countries enter into a transaction:

A noncancelable sales order that specifies foreign currency price and date of delivery is known as a:

What is "hedge accounting?"

What is a foreign currency transaction?

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

In hedge accounting, which of the following exposure should be hedged by foreign currency derivative?

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

How is the fair value of a foreign currency option calculated?

Introduction to International Accounting

Worldwide Accounting Diversity

International Convergence of Financial Reporting

International Financial Reporting Standards: Part I

International Financial Reporting Standards: Part II

Translation of Foreign Currency Financial Statements

International Taxation

International Transfer Pricing

Management Accounting Issues in Multinational Corporations

Auditing and Corporate Governance: An International Perspective

International Sustainability Reporting

Filters