Question 1

The forward exchange rate is

Accepted Answer

A)  the rate quoted for delivery within two business days. 
B)  usually higher than the spot rate. 
C)  a contract rate between the corporation and the foreign exchange trader at the bank. 
D)  usually at a premium for sales and a discount for purchases. 
A)  the rate quoted for delivery within two business days. 
B)  usually higher than the spot rate. 
C)  a contract rate between the corporation and the foreign exchange trader at the bank. 
D)  usually at a premium for sales and a discount for purchases. C

Question 2

The difference between the spot and forward rate is

Accepted Answer

A)  deferred until Lewis receives payment from the British importer. 
B)  taken to the income statement when the contract is entered into. 
C)  an adjustment to retained earnings. 
D)  adjusted for foreign exchange gains and losses over the life of the contract. 
A)  deferred until Lewis receives payment from the British importer. 
B)  taken to the income statement when the contract is entered into. 
C)  an adjustment to retained earnings. 
D)  adjusted for foreign exchange gains and losses over the life of the contract. D

Question 3

A transaction exposure risk can be eliminated with a

Accepted Answer

A)  call option 
B)  put option 
C)  forward 
D)  bank deposit in the foreign country 
A)  call option 
B)  put option 
C)  forward 
D)  bank deposit in the foreign country C

Question 4

If the spread between a forward and the spot is negative, the currency is at a premium.

Accepted Answer

A) True 
 B)False

Question 5

The interbank market is the most important market in trading foreign exchange.

Accepted Answer

A) True 
 B)False

Question 6

Assume that RadCo International purchases ski equipment on account from a German exporter on October 1 and that the sale is denominated in 500,000 German marks. RadCo closes its books at the end of each month, and the payable is due on November 15. The following are the relevant exchange rates.
 $ \begin{array}{lr}\text { Spot rate on October 1 } & \$ 0.5939 \ \text { Forward rate for Nov 15 delivery } & \$ 0.5945 \ \text { Spot rate on October 31 } & \$ 0.5948 \ \text { Spot rate on Nov 15 } & \text { S0.5941 }\end{array} $

Questions 34-38 assumes the treatment of FASB Statement 52 and that no forward contract is entered into.
-What is the amount of the foreign exchange gain or loss that it will recognize on October 31?

Accepted Answer

A)  $300 loss 
B)  $450 loss 
C)  $450 gain 
D)  $150 loss 
E)  gain or loss is deferred 
A)  $300 loss 
B)  $450 loss 
C)  $450 gain 
D)  $150 loss 
E)  gain or loss is deferred

Question 7

Most companies do nothing about foreign exchange rate risk.

Accepted Answer

A) True 
 B)False

Question 8

The exchange rate quoted for transactions within two business days is the

Accepted Answer

A)  spot rate. 
B)  the forward rate. 
C)  the current rate. 
D)  the swap rate. 
A)  spot rate. 
B)  the forward rate. 
C)  the current rate. 
D)  the swap rate.

Question 9

The most widely traded currency in the world is the

Accepted Answer

A)  Japanese yen. 
B)  German mark. 
C)  British pound. 
D)  U.S. dollar. 
A)  Japanese yen. 
B)  German mark. 
C)  British pound. 
D)  U.S. dollar.

Question 10

Hedging

Accepted Answer

A)  guarantees speculative gains 
B)  eliminates speculative gains 
C)  is not done by many companies 
D)  always includes a swap 
A)  guarantees speculative gains 
B)  eliminates speculative gains 
C)  is not done by many companies 
D)  always includes a swap

Question 11

In the case of a forward contract used to hedge a foreign currency commitment,

Accepted Answer

A)  the gain or loss on the contract should be deferred and included in the measurement of the related foreign currency transaction. 
B)  the gain or loss on the contract should be recognized in the period in which the exchange rate changes. 
C)  the premium or discount must be written off over the life on the contract. 
D)  the related foreign currency transaction will be recorded on the books at the rate in effect when title passes. 
A)  the gain or loss on the contract should be deferred and included in the measurement of the related foreign currency transaction. 
B)  the gain or loss on the contract should be recognized in the period in which the exchange rate changes. 
C)  the premium or discount must be written off over the life on the contract. 
D)  the related foreign currency transaction will be recorded on the books at the rate in effect when title passes.

Question 12

In terms of derivatives, FASB Statement 52 deals with

Accepted Answer

A)  forward contracts and futures contracts. 
B)  forward contracts and currency swaps. 
C)  all types of derivatives. 
D)  options but not forwards. 
A)  forward contracts and futures contracts. 
B)  forward contracts and currency swaps. 
C)  all types of derivatives. 
D)  options but not forwards.

Question 13

The bid rate is

Accepted Answer

A)  the rate at which the foreign exchange trader will buy foreign currency. 
B)  the rate at which the foreign exchange trader will sell foreign currency. 
C)  the rate at which the company doing business with the trader will buy foreign currency. 
D)  the rate at which the company doing business with the trader will sell foreign currency. 
A)  the rate at which the foreign exchange trader will buy foreign currency. 
B)  the rate at which the foreign exchange trader will sell foreign currency. 
C)  the rate at which the company doing business with the trader will buy foreign currency. 
D)  the rate at which the company doing business with the trader will sell foreign currency.

Question 14

When the currency of an exporter is strengthening the corresponding importer

Accepted Answer

A)  would tend to decrease prices 
B)  might begin producing the goods domestically 
C)  might begin producing the goods in the exporting country 
D)  would only use a financial hedging strategy 
A)  would tend to decrease prices 
B)  might begin producing the goods domestically 
C)  might begin producing the goods in the exporting country 
D)  would only use a financial hedging strategy

Question 15

Over the long run, exchange rates are determined by purchasing power parity.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is not a criterion that must exist for hedge accounting to function:

Accepted Answer

A)  Item to be hedge exposes the enterprise to price, currency, or interest rate risk. 
B)  The hedge position reduces the exposure. 
C)  The hedge position is designated as a hedge. 
D)  The enterprise would suffer a loss in the absence of the hedge. 
A)  Item to be hedge exposes the enterprise to price, currency, or interest rate risk. 
B)  The hedge position reduces the exposure. 
C)  The hedge position is designated as a hedge. 
D)  The enterprise would suffer a loss in the absence of the hedge.

Question 17

Assume that Lewis International sells running shoes to a British importer on June 1 and that the sale is denominated at £75,000 and will be collected on July 15. Also assume that Lewis closes its books at the end of each month. The following are the relevant exchange rates.
 $ \begin{array}{ll}\text { Spot rate on June 1 } & \$ 1.6200 \ \text { Forward rate for July } & \ \text { 15 delivery } & \$ 1.6000 \ \text { Spot rate on June 30 } & \$ 1.6100 \ \text { Spot rate on July 15 } & \$ 1.5950\end{array} $

For questions 25-29, assume FASB Statement 52 treatment and that Lewis enters into a forward contract.
-If Lewis had purchased merchandise rather than sold it, what would be your answer to question 30?

Accepted Answer

A)  $375 foreign exchange gain 
B)  $375 foreign exchange loss 
C)  $1500 foreign exchange loss 
D)  $1500 foreign exchange gain 
A)  $375 foreign exchange gain 
B)  $375 foreign exchange loss 
C)  $1500 foreign exchange loss 
D)  $1500 foreign exchange gain

Question 18

Economic exposure is also known as operating exposure.

Accepted Answer

A) True 
 B)False

Question 19

Assuming that you entered into the option and the strike price were 160, what would be your net cash proceeds on July 15?

Accepted Answer

A)  $117,000.00 
B)  $120,000.00 
C)  $117,537.50 
D)  $117,512.50 
A)  $117,000.00 
B)  $120,000.00 
C)  $117,537.50 
D)  $117,512.50

Question 20

The balancing of a foreign exchange gain or loss on a transaction with a derivative loss or gain is known as

Accepted Answer

A)  hedge accounting. 
B)  a swap. 
C)  a forward option. 
D)  luck. 
A)  hedge accounting. 
B)  a swap. 
C)  a forward option. 
D)  luck.

The forward exchange rate is

The difference between the spot and forward rate is

A transaction exposure risk can be eliminated with a

If the spread between a forward and the spot is negative, the currency is at a premium.

The interbank market is the most important market in trading foreign exchange.

Most companies do nothing about foreign exchange rate risk.

The exchange rate quoted for transactions within two business days is the

The most widely traded currency in the world is the

Hedging

In the case of a forward contract used to hedge a foreign currency commitment,

In terms of derivatives, FASB Statement 52 deals with

The bid rate is

When the currency of an exporter is strengthening the corresponding importer

Over the long run, exchange rates are determined by purchasing power parity.

Which of the following is not a criterion that must exist for hedge accounting to function:

Economic exposure is also known as operating exposure.

Assuming that you entered into the option and the strike price were 160, what would be your net cash proceeds on July 15?

The balancing of a foreign exchange gain or loss on a transaction with a derivative loss or gain is known as

International Accounting and International Business

International Accounting Patterns, Culture and Development

Comparative International Financial Accounting I

Comparative International Financial Accounting II

International Financial Statement Analysis

International Transparency and Disclosure

International Accounting Standards and Global Convergence

International Business Combinations, Goodwill and Intangibles

International Segment Reporting

Foreign Currency Transactions and Translation

International Accounting for Price Changes

Corporate Governance and Control of Global Operations

International Budgeting and Performance Evaluation

International Auditing Issues

International Taxation Issues

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Exam 13: Foreign Exchange Risk Management

The forward exchange rate is

The difference between the spot and forward rate is

A transaction exposure risk can be eliminated with a

If the spread between a forward and the spot is negative, the currency is at a premium.

The interbank market is the most important market in trading foreign exchange.

Most companies do nothing about foreign exchange rate risk.

The exchange rate quoted for transactions within two business days is the

The most widely traded currency in the world is the

Hedging

In the case of a forward contract used to hedge a foreign currency commitment,

In terms of derivatives, FASB Statement 52 deals with

The bid rate is

When the currency of an exporter is strengthening the corresponding importer

Over the long run, exchange rates are determined by purchasing power parity.

Which of the following is not a criterion that must exist for hedge accounting to function:

Economic exposure is also known as operating exposure.

Assuming that you entered into the option and the strike price were 160, what would be your net cash proceeds on July 15?

The balancing of a foreign exchange gain or loss on a transaction with a derivative loss or gain is known as

International Accounting and International Business

International Accounting Patterns, Culture and Development

Comparative International Financial Accounting I

Comparative International Financial Accounting II

International Financial Statement Analysis

International Transparency and Disclosure

International Accounting Standards and Global Convergence

International Business Combinations, Goodwill and Intangibles

International Segment Reporting

Foreign Currency Transactions and Translation

International Accounting for Price Changes

Corporate Governance and Control of Global Operations

International Budgeting and Performance Evaluation

International Auditing Issues

International Taxation Issues

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