Chapter 7 Flashcards
__________________ means making an investment or acquiring some derivative or non-derivative instruments in order to offset potential losses (or gains) that may be incurred on some items as a result of particular risk.
HEDGING
In a cash flow hedge, amounts initially reported in OCI are reclassified to earnings when the transaction on the hedged items is reported in earnings.
TRUE
Hedging is used to capitalize on foreign currency exchange rate fluctuations.
FALSE
A binding agreement for the exchange of resources where the quantity, price, and dates are specified.
FIRM COMMITMENT
________________ means designating one or more hedging instruments so that their change in fair value offsets the change in cash flows of a hedged item.
HEDGE ACCOUNTING
Any portion of a derivative foreign gain that is determined to be ineffective must be reported currently in OCI.
FALSE
The total face amount of the asset or liability that underlies the derivative contract.
NOTIONAL AMOUNT
A contract between two parties that gives the buyer the right, but not the obligation to purchase or sell something to the option seller at a date in the future at a price agreed to.
OPTION CONTRACTS
Hedging a foreign currency receivable is protecting against the loss on a forecasted transaction.
FALSE
An asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign operation that exposes the entity to risk of changes in fair value or future cash flows.
HEDGED ITEM
_________________ are transactions that are expected to occur in the future but for which no asset or liability has been recognized.
FORECASTED TRANSACTION
In a foreign exchange forward involving buying a foreign currency, the buyer is said to be “short” in that currency.
FALSE
The foreign exchange rate is the currency exchange rate predicted to exist at a future date.
TRUE
In the context of foreign exchange forwards, this pertains to accounting for premiums and discounts separately from changes in the intrinsic value
SPLIT ACCOUNTING
A foreign currency forward contract is an agreement to exchange currency units at a later date at an agreed exchange rate.
TRUE
_________________ refers to a designated derivative or designated non-derivative financial asset or liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item.
HEDGING INSTRUMENTS
Gains and losses resulting from a receivable or payable hedge with a foreign currency forward contract are placed in OCI until the transaction occurs.
FALSE
If management does not hedge a purchase commitment in a foreign currency, the company is exposed to exchange rate fluctuation risk from the date the purchase commitment occurs until the transaction date.
TRUE
The recording of an inventory purchase transaction will be different when hedged with an option contract as compared to when it is hedged with a forward contract.
FALSE
A financial instrument that provides the holder or writer with the right to (or obligation) to participate in some or all the price changes of another underlying value of measure.
DERIVATIVE INSTRUMENTS
Gains and losses on a foreign currency commitment are recognized as gains or losses on the income statement in the period when the underlying transaction occurs.
FALSE
The risk from foreign currency exchange rate fluctuations can occur both before and after the transaction.
TRUE
Generally, a journal entry is not required at the date a foreign currency forward contract is created.
TRUE
In a foreign exchange forward involving selling a foreign currency, the buyer is said to be “short” in that currency.
TRUE
The hedge of a foreign currency payable or receivable results in the manager not knowing the amount of cash that will be paid or received.
FALSE