Derivatives

Question 1

Put Option

Answer 1

confers the right on the holder of the option to sell the stock at a price, regardless of the trading price of the underlying asset/stock. buys the right to sell the underlying stock to the put option holder at a predetermined rate.

Question 2

Notional Amount

Answer 2

a number of currency units, shares, bushels, pounds, or other units specified in a derivative instrument.

Question 3

Fair Value Hedge

Answer 3

if all of the following additional criteria are met:
• The hedged item is specifically identified as either all or a specific portion of a recognized asset or liability or of an unrecognized firm commitment.
• The hedged item is a single asset or liability (or a specific portion thereof) or is a portfolio of similar assets or a portfolio of similar liabilities.
• The hedged item presents an exposure to changes in fair value attributable to the hedged risk that could affect reported earnings.

Question 4

Forward Exchange Contract

Answer 4

an agreement to exchange different currencies at a specified future date and at a specified rate (the forward rate).

Question 5

Foreign Currency Hedge

Answer 5

The accounting for a gain or loss on a foreign currency transaction that is intended to hedge an identifiable foreign currency commitment (for example, an agreement to purchase or sell equipment)

Question 6

Fair Value Hedge Reporting

Answer 6

recognized currently in earnings.

Question 7

Forward Exchange Contract Gain or Loss

Answer 7

computed by multiplying the foreign currency amount of the contract by the difference between the forward rate at the balance sheet date and the forward rate at the inception of the contract (or the forward rate last used to measure a gain or loss on that contract for an earlier period).

Question 8

Spot Rate

Answer 8

Fluctuations in foreign exchanges (spot rate) will result in a gain or loss in inventory or receivable/payable. Such fluctuations always use the spot rate.

Question 9

Forward Contracts

Answer 9

an agreement to exchange two different currencies at a future date, at a specific rate

Question 10

Gains or Losses on Forward Contracts

Answer 10

use the forward rate.

Question 11

Fair Value Hedges

Answer 11

the gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period. Net loss or gain in the hedging activity indicates the effectiveness of the hedge.

Question 12

Call Option

Answer 12

represents the right, but not the obligation, to buy a set number of shares of stock at a predetermined ‘strike price’ before the option reaches its expiration date. purchased in hopes that the underlying stock price will rise in the future well above the strike price.

Question 13

Foreign Currency Hedge

Answer 13

An entity may designate a derivative instrument or a non derivative financial instrument that may give rise to a foreign currency transaction gain or loss as a hedge of the foreign currency exposure of a net investment in a foreign operation.

Question 14

Reporting of Foreign Currency Transactions

Answer 14

Gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity are not included in determining net income, but are reported in the same manner as translation adjustments

Question 15

Current Cost Accounting

Answer 15

adjusts the depreciation and cost of goods sold reported in the historical cost income statement by applying specific price indexes to these amounts.