Chapter 9 - Foreign Currency Transactions & Hedging Flashcards
Put option
Gives the company the right but not the obligation to sell.
When strike price and spot rate are the same?
There is no intrinsic value.
Appreciation in a foreign currency results in what when the foreign currency is to be received?
A foreign exchange gain when the foreign currency is to be received.
Appreciation in a foreign currency results in what when the foreign currency is to be paid?
A foreign exchange loss when the foreign currency is to be paid.
A decrease in the value of a foreign currency results in what when the foreign currency is to be received?
Foreign exchange loss when the foreign currency is to be received.
A decrease in the value of a foreign currency results in what when the foreign currency is to be paid?
Foreign exchange gain when the foreign currency is to be paid.
Hedging involves what?
- Establishing a price today at which a foreign currency to be received in the future can be sold in the future.
- Establishing a price today at which a foreign currency to be paid in the future can be purchased in the future.
What are the 2 most popular instruments for hedging foreign exchange risk?
- Foreign currency forward contacts.
2. Foreign currency options.
What is a forward contract?
A binding agreement to exchange currencies at a predetermined rate.
What is a Foreign Currency Option?
Gives the buyer the right, but not the obligation, to exchange currencies at a predetermined rate.
Hedge account requires what?
Reporting gains and losses on the hedging instrument in net income in the same period as gains and losses on the item being hedged.
Changes in fair value are included in what two areas and when?
- Accumulated other comprehensive income (AOCI) if the derivative is designed as a cash flow hedge.
- Net income if it is designated as a fair value hedge.
Companies must report all derivatives including _____ on the balance sheet at their ____ _____.
Companies must report all derivatives including contracts and options on the balance sheet at their fair value.
Foreign currency firm commitment is also known as?
Fair Value Hedge
Forecasted transaction is also known as?
Cash Flow Hedge
An import purchase causes a foreign currency payable to be carried on the books. If the foreign currency depreciates, it yields a foreign exchange ___.
Gain
An import purchase causes a foreign currency payable to be carried on the books. If the foreign currency appreciates, it yields a foreign exchange ___.
Loss
If you have an export sale and the foreign currency appreciates, do you have a foreign exchange gain or loss?
Gain
If you have an export sale and the foreign currency depreciates, do you have a foreign exchange gain or loss?
Loss
Spot Rate
The price at which a foreign currency can be purchased or sold today.
Forward Rate
The price today at which foreign currency can be purchased or sold sometime in the future.
Define selling at a Premium
When the forward rate exceeds the spot rate on a given date.
When the foreign interest rate is less than the domestic interest rate.
Define selling at a Discount
When the forward rate is less than the spot rate on a given date.
When the interest rate in the foreign country exceeds the domestic interest rate.
Strike Price
The exchange rate at which the option will be executed if the option holder decides to exercise the option.
What is an Option Premium and it’s two components
It’s called an Option Premium when you purchase an option.
- Intrinsic Value: is equal to the gain that could be realized by exercising the option immediately.
- Time Value: relates to the fact that the spot rate can change over time and cause the option to become in the money
When does a transaction exposure exist for an Export Sale?
When the exporter allows the buyer to pay in a foreign currency and allows the buyer to pay sometime after the sale has been made.
The exporter is exposed to the risk that the foreign currency might depreciate (thereby decreasing the U.S. dollars ultimately collected).
When does a transaction exposure exist for an Import Purchase?
When the importer is required to pay in foreign currency and is allowed to pay sometime after the purchase has been made.
The importer is exposed to the risk that the foreign currency might appreciate (thereby increasing the U.S. dollars that have to be paid for the imported goods).
In accounting for foreign currency transactions, which approaches is used in the U.S?
Two-transaction perspective; defer foreign exchange gains and losses.
One-transaction perspective; defer foreign exchange gains and losses.
Two-transaction perspective; accrue foreign exchange gains and losses.
Two-transaction perspective; accrue foreign exchange gains and losses.
Which of the following statements is true concerning hedge accounting?
Hedges of foreign currency firm commitments are used for future purchases only.
Hedges of foreign currency firm commitments are used for current sales or purchases.
Hedges of foreign currency firm commitments are used for future sales or purchases.
Hedges of foreign currency firm commitments are used for future sales or purchases.
Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco’s fiscal year-end. The pertinent exchange rates were as follows:
5/8 $1.25
5/31 $1.26
7/7 $1.20
How much U.S. $ will it cost Brisco to finally pay the payable on June 7?
$2,520,000.
$2,500,000.
$2,400,000.
$2,400,000.
$1.20 × FC 2,000,000 = FC 2,400,000 A/P
U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except
Forecasted foreign currency denominated transactions.
Net investment in foreign operations.
Deferred foreign currency gains and losses.
Deferred foreign currency gains and losses.
The forward rate may be defined as
The price a foreign currency can be purchased or sold today.
The price today at which a foreign currency can be purchased or sold in the future.
The forecasted future value of a foreign currency.
The price today at which a foreign currency can be purchased or sold in the future.
A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?
If the foreign currency depreciates, a foreign exchange gain will result.
No foreign exchange gain or loss will result.
If the foreign currency appreciates, a foreign exchange loss will result.
No foreign exchange gain or loss will result.
Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly included in Mills’ balance sheet at $132,000. When the receivable was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills’ 2013 consolidated income statement, how much should have been reported as a foreign exchange gain?
$0. $36,000. $48,000. $10,000. $12,000.
$12,000.
$144,000 - $132,000 = $12,000 Gain
A forward contract may be used for which of the following?
1) A fair value hedge of an asset.
2) A cash flow hedge of an asset.
3) A fair value hedge of a liability.
4) A cash flow hedge of a liability.
1 and 3 2 and 4 1 and 2 1, 3, and 4 1, 2, 3, and 4
1, 2, 3, and 4
On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014.
Option Premium
12/1/13 $.05
12/31/13 $.04
2/1/14 $.03
Compute the fair value of the foreign currency option at February 1, 2014. $6,000. $4,500. $3,000. $7,500.
$4,500.
$.03 × C$150,000 = $4,500
Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, and the forward rate was $.021. Which of the following did the U.S. exporter report in net income?
Discount revenue.
Premium revenue.
Discount expense.
Premium expense.
Discount expense.
In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?
$71,428. $76,924. $588. $582. $0, since there is no cost, there is no value for the contract at this date.
$0, since there is no cost, there is no value for the contract at this date.
Forward Contract Not Recorded at Date of Sale
The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014.
What amount should be included as a foreign exchange gain or loss from the two transactions for 2014?
$1,000 loss. $1,000 gain. $2,000 loss. $4,000 gain. $4,000 loss.
$4,000 loss.
$295,000 - $299,000 = ($4,000) Loss
