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FAR Module 19 Flashcards

0
Q

Describe a foreign currency translation

A

This is where you are converting entire financial statements to US dollars from a foreign currency

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1
Q

Describe a foreign currency transaction

A

This is a purchase or sale where the money exchanged is not in US dollars. You will usually only be converting the individual purchase or sale to US dollars, not entire financial statements (like a foreign currency translation)

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2
Q

This is the process of separating an embedded derivative from its host contract. This process is necessary so that hybrid instruments can be separated into their component parts, each being accounted for using the appropriate valuation techniques

A

Bifurcation

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3
Q

What is a hybrid instrument

A

This is a financial instrument or other contract that contains an embedded derivative

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4
Q

This is an option in which the price of the underlying is equal to the strike or exercise price

A

An at the money option

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5
Q

This provides a holder with the right to acquire an underlying at an exercise or strike price any time during the option term. A premium is paid by the holder for the right to benefit from the appreciation in the underlying

A

Call option

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6
Q

Derivative instruments are Financial instruments or other contracts that have what three distinguishing characteristics?

A

1) one or more underlying’s and one or more notional amounts (or payment provisions or both)
2) no initial net investment or a smaller net investment than required for contracts expected to have a similar response to market changes

3) terms that require or permit:
A) net settlement
B) net settlement by means outside the contract
C) delivery of an asset that results in a position substantially the same as net settlement

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7
Q

The foreign currency amount of a contract multiplied by the difference between the contracted forward rate and the spot rate at the date of inception of the contract will result in what?

A

A discount or premium on a forward contract

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8
Q

A feature on a financial instrument or other contract which if the feature stood alone would meet the definition of a derivative

A

An embedded derivative

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9
Q

This is an agreement with an unrelated party, binding on both, usually legally enforceable, specifying all significant terms, and including a disincentive for nonperformance sufficient to make performance likely

A

Firm commitment

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10
Q

This is a transaction expected to occur for which there is no firm commitment, and thus, which gives the entity no present rights or obligations. These can be hedged and special hedge accounting can be applied

A

Forecasted transaction

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11
Q

This is an agreement between two parties to buy and sell a specific quantity of a commodity, foreign currency, or financial instrument at an agreed-upon price, with delivery and settlement at a designated future date. Because this is not formally regulated, each party to the contract is subject to the default of the other party

A

Forward contract

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12
Q

This is an agreement to exchange at a specified future date currencies of different countries at a specified rate

A

Forward exchange contract

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13
Q

This is a contract to make or take delivery of a designated financial instrument, foreign currency, or commodity during a designated period, at a specific price or yield. The contract frequently has provisions for cash settlement. This is traded on a regulated exchange and therefore involves little credit risk

A

Futures contract

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14
Q

This is the term to describe a call option if the price of the underlying is greater than the strike or exercise price of the underlying

A

In the money

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15
Q

This is commonly a number of units such as shares of stock, principal amount, face value, stated value, basis points, barrels of oil, etc. It may be that amount plus a premium or minus a discount. The interaction of the price or rate with the referenced associated asset or liability determines whether settlement is required and if so at what amount

A

The notional amount

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16
Q

This is the term to describe a call option if the strike or exercise price is greater than the price of the underlying. It is also the term to describe a put option if the price of the underlying is greater than the strike or exercise price

A

Out of the money

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17
Q

This is a forward based contract or agreement that is generally between two counterparties to exchange streams of cash flows over a specified period in the future

A

Swap

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18
Q

This is an option on a swap that provides the holder with the right to enter into a swap at a specified future date at specified terms. These derivatives have characteristics of an option and an interest rate swap

A

Swaption

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19
Q

What disclosures are required regarding foreign currency transactions

A

Aggregate transaction gain or loss that is included in the entities net income

significant rate changes subsequent to the date of the financial statements including effects on unsettled foreign currency transactions

20
Q

T/F

you always want to use the spot rate in dealing with Foreign Currency Transactions

A

TRUE

21
Q

T/F

A foreign currency devaluation can not ever be considered an extraordinary gain or loss

A

TRUE

22
Q

In the following phrase, what is the underlying, what is the notional amount, and what is the settlement amount?

“Option to purchase 1 million bushels of corn at $1/bushel”

A

1 million bushels = Notional Amount
$1/bushel = Underlying
$1,000,000 = Settlement Amount

23
Q

Which of the following is an example of a notional amount?

a) number of barrels of oil
b) interest rates
c) currency swaps
d) stock prices

A

A - Number of barrels of oil

24
Q

Which of the following is an example of an underlying?

a) number of barrels of oil
b) interest rates
c) currency swaps
d) stock prices

A

Both B & D (interest rates and stock prices) are examples of an underlying

25
Q

Which of the following is an example of a derivative?

a) number of barrels of oil
b) interest rates
c) currency swaps
d) stock prices

A

C - Currency Swaps are an example of a derivative instrument

26
Q

What are common financial instruments and contracts that meet the definition of a derivative instrument?

A 
Call/Put Options
Futures Contracts
Interest Rate Swaps
Currency Swaps
Swaptions (an option on a swap)
Credit indexed contracts
Interest rate caps/floors/collars
Stock Options
27
Q

What are common financial instruments and contracts that do not meet the definition of a derivative instrument?

A 
Normal purchases/sales
Debt & Equity Securities
Leases
Mortgage-Backed Securities
Employee Stock Options
Royalty Agreements 
Contracts tied to sales volumes
Variable annuity contracts
Adjustable Rate Loans
Guaranteed investment contracts
Nonexchanged traded contracts tied to physical variables
Derivatives that serve as impediments to sales accounting
28
Q

What are the three types of hedging instruments?

A

FV Hedge
Cash Flow Hedge
Foreign Currency Hedges

29
Q

What are the two criteria that must be met for a derivative to qualify as a hedging instrument?

A

Documentation provided at the beginning to identify the objective and strategy of the hedge, the hedging instrument and hedged item, and how the effectiveness of the hedge will be assessed on an ongoing base

The hedge must be highly effective throughout its life

30
Q

How often is a hedge’s effectiveness measured?

A

Effectiveness must be measured every three months and whenever earnings or financial statements are reported. The method used to assess effectiveness must be consistent over the period of the hedge and consistent with regards to similar types of hedging instruments.

31
Q

What is considered an effective change in the value of a hedging instrument?

A

80-125%

32
Q

What is a FV Hedge?

A

This is the use of a derivative to hedge the exposure to changes in the FV of an asset/liability

33
Q

How does a hedged item qualify to be a FV hedge?

A

the hedged item must be all or a specific portion of a recognized asset/liability.

For an unrecognized firm commitment to qualify it must be binding on both parties, specific with respect to all significant terms, and contain a nonperformance clause that makes performance probable

34
Q

Gains/Losses on a FV hedge should be recognized where in the FS?

A

in the current earnings

35
Q

What are cash flow hedges?

A

derivative instruments used to hedge the exposure to variability in expected future cash flows

36
Q

How does a hedged item qualify to be a cash flow hedge?

A

The hedged asset/liability and hedging instrument must be linked. Linked is established if the basis for the change in cash flows is the same for the hedged asset/liability and the hedging instrument.

Cash flows must be highly effective.

If hedged asset/liability is not a firm commitment it must be considered probable

37
Q

The effective portion of a cash flow hedge is recognized where in the FS?

A

in other comprehensive income

38
Q

The ineffective portion of a cash flow hedge is recognized where in the FS?

A

income from continuing operations

39
Q

T/F

in a forward contract you always use the forward rate. in a foreign currency transaction you always use the spot rate

A

TRUE

40
Q

T/F

A forward contract is more vague

A

TRUE

41
Q

T/F

A futures contract is totally spelled out and standardized

A

TRUE

42
Q

According to ASC topic 815 when a company elect not to bifurcate a hybrid financial instrument the entire hybrid instrument should be valued at

A

Fair value

43
Q

If a company elects not to bifurcate a hybrid financial instrument and records the entire instrument at fair value how are the changes in fair value of the hybrid instrument recognized

A

Changes in fair value of the hybrid instrument are recognize each year in earnings

44
Q

Hedge Accounting is permitted for what four types of hedges

A

1) Unrecognized firm commitments
2) available-for-sale securities
3) foreign currency denominated hedge forecasted transactions
4) net investment in foreign operations

45
Q

What are the four foreign-currency hedges

A

1) Unrecognized firm commitments
2) available-for-sale securities
3) foreign currency denominated hedge forecasted transactions
4) net investment in foreign operations

46
Q

Disclosure of credit risk of financial instruments with off-balance-sheet risk should include… (3)

A

1) The amount of accounting loss the entity would incur should any party to the financial instrument fail to perform
2) The entities policy of requiring collateral or security
3) The class of financial instruments held

47
Q

Disclosure of information about significant concentrations of credit risk is required for …

A

All financial instruments

far personal flashcards (34 decks)

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