Chapter 7

Question 1

__________________ 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.

Answer 1

HEDGING

Question 2

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.

Answer 2

TRUE

Question 3

Hedging is used to capitalize on foreign currency exchange rate fluctuations.

Answer 3

FALSE

Question 4

A binding agreement for the exchange of resources where the quantity, price, and dates are specified.

Answer 4

FIRM COMMITMENT

Question 5

________________ means designating one or more hedging instruments so that their change in fair value offsets the change in cash flows of a hedged item.

Answer 5

HEDGE ACCOUNTING

Question 6

Any portion of a derivative foreign gain that is determined to be ineffective must be reported currently in OCI.

Answer 6

FALSE

Question 7

The total face amount of the asset or liability that underlies the derivative contract.

Answer 7

NOTIONAL AMOUNT

Question 8

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.

Answer 8

OPTION CONTRACTS

Question 9

Hedging a foreign currency receivable is protecting against the loss on a forecasted transaction.

Answer 9

FALSE

Question 10

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.

Answer 10

HEDGED ITEM

Question 11

_________________ are transactions that are expected to occur in the future but for which no asset or liability has been recognized.

Answer 11

FORECASTED TRANSACTION

Question 12

In a foreign exchange forward involving buying a foreign currency, the buyer is said to be “short” in that currency.

Answer 12

FALSE

Question 13

The foreign exchange rate is the currency exchange rate predicted to exist at a future date.

Answer 13

TRUE

Question 14

In the context of foreign exchange forwards, this pertains to accounting for premiums and discounts separately from changes in the intrinsic value

Answer 14

SPLIT ACCOUNTING

Question 15

A foreign currency forward contract is an agreement to exchange currency units at a later date at an agreed exchange rate.

Answer 15

TRUE

Question 16

_________________ 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.

Answer 16

HEDGING INSTRUMENTS

Question 17

Gains and losses resulting from a receivable or payable hedge with a foreign currency forward contract are placed in OCI until the transaction occurs.

Answer 17

FALSE

Question 18

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.

Answer 18

TRUE

Question 19

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.

Answer 19

FALSE

Question 20

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.

Answer 20

DERIVATIVE INSTRUMENTS

Question 21

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.

Answer 21

FALSE

Question 22

The risk from foreign currency exchange rate fluctuations can occur both before and after the transaction.

Answer 22

TRUE

Question 23

Generally, a journal entry is not required at the date a foreign currency forward contract is created.

Answer 23

TRUE

Question 24

In a foreign exchange forward involving selling a foreign currency, the buyer is said to be “short” in that currency.

Answer 24

TRUE

Question 25

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.

Answer 25

FALSE