Chapter 9 Smartbook

The current spot rate to purchase a foreign currency is $1.00. The intrinsic value of an option to purchase that foreign currency at a strike price of $0.90 is

$0.10 per foreign currency unit.

The original discount (or premium) on a forward contract is determined by the difference in the forward rate on the date the forward contract is signed and

the spot rate on the date the forward contract is signed.

The fair value of a foreign currency forward contract is determined by reference to

changes in the forward rate over the life of the forward contract.

With regard to the corporate strategy used to hedge foreign exchange risk

companies follow a variety of different strategies.

A derivative financial instrument such as a foreign currency forward contract is carried on the balance sheet at its _____ value.

fair

U.S. GAAP requires hedges to be recognized as fair value hedges or cash flow hedges. IFRS requires hedges to be recognized as

fair value hedges or cash flow hedges.

A foreign currency forward contract is always reported on the balance sheet either as an asset or as a liability at its

fair value.

A foreign currency option is always reported on the balance sheet at its

fair value.

True or false: Almost all companies establish hedges for all of their foreign currency transactions. True false question. True

false

In assessing the effectiveness of a forward contract as a hedge, forward points

may be excluded.

In assessing the effectiveness of an option as a foreign currency hedge, the option's time value

may be excluded.

An increase in the fair value of a foreign currency forward contract used to hedge a cash flow exposure related to a foreign currency denominated asset or liability is reported as

- a change in other comprehensive income - an asset on the balance sheet.

An increase in the fair value of a foreign currency forward contract used to hedge a fair value exposure of a foreign currency denominated asset or liability is reported as

- an asset on the balance sheet. - a foreign exchange gain in net income.

In accounting for a cash flow hedge of a foreign currency denominated asset or liability the change in fair value of a foreign currency derivative is reported as

- an asset or liability on the balance sheet. - a change in other comprehensive income.

In accounting for a fair value hedge of a foreign currency denominated asset or liability, the change in fair value of a foreign currency derivative is reported

- as a foreign exchange gain or loss in net income. - as an asset or liability on the balance sheet.

When only the spot component of a forward contract is designated as the hedging instrument, the forward points may be recognized in net income

- based on the change in fair value of the forward points. - on a straight-line basis over the life of the forward contract.

When only the intrinsic value of an option is designated as the hedging instrument, the option's time value may be recognized in net income

- based on the change in fair value of the time value component of the option. - on a straight-line basis over the life of the option.

An enterprise enters into a forward contract to hedge the foreign exchange risk associated with an account payable in a foreign currency. To be considered highly effective the forward contract should

- be of the same currency type as the account payable. - have a settlement date that is the same as the due date of the account payable. - be for the same amount of foreign currency as the account payable.

In accounting for a foreign currency borrowing, both the note payable and any accrued interest payable on the note are

- exposed to foreign exchange risk. - revalued for changes in the foreign exchange rate.

To qualify for hedge accounting, a foreign currency derivative must be used to hedge a

- fair value exposure to foreign exchange risk. - cash flow exposure to foreign exchange risk.

The types of hedge that can be designated as a fair value hedge include

- hedges of foreign currency firm commitments. - hedges of foreign currency-denominated assets and liabilities.

Foreign currency derivatives qualify for hedge accounting only if the derivative

- is used to hedge either a cash flow exposure or a fair value exposure to foreign exchange risk. - is properly documented as a hedge. - is highly effective as a hedge.

Hedge documentation required for hedge accounting must include information about

- the type of exposure (cash flow or fair value) being hedged. - the reason for entering into the hedge.

When the strike price on the exercise date of an option to sell foreign currency is smaller than the spot rate on that date, the option

- will expire unexercised. - has a value of zero.

Similar to a foreign currency firm commitment, a forecasted foreign currency denominated transaction is recognized as an asset or liability on the balance sheet.

False

The amount of sales revenue recognized from an export sale denominated in a foreign currency is adjusted for the change in exchange rate from the date of sale until the date of cash collection.

False

True or false: Almost all companies establish hedges for all of their foreign currency transactions.

False

True or false: IFRS and U.S. GAAP have very different rules related to the accounting for foreign currency transactions.

False

A company is able to enter into a forward contract with its bank for a wide variety of foreign currencies.

True

Formal documentation of a hedging relationship must explain how the hedging instrument's effectiveness will be measured.

True

True or false: Unlike U.S. GAAP, IFRS allows certain nonderivative financial instruments to be designated as hedging instruments.

True

A U.S. importer has a foreign currency-denominated import purchase. With regard to the difference in the amount of U.S. dollars that could have been paid on the date of purchase and the amount of U.S. dollars actually paid on the date of payment, the U.S. importer should recognize

a foreign exchange gain or loss in net income.

The change in fair value of a foreign currency forward contract used as a fair value hedge of a foreign currency denominated asset or liability is recognized as

a foreign exchange gain or loss in net income.

A company accrues interest payable on a foreign currency borrowing at the end of the year. When the foreign currency-denominated interest is paid, the difference in the amount of accrued interest and the amount actually paid resulting from a change in the exchange rate should be recognized as

a foreign exchange gain or loss.

At the balance sheet date, a foreign currency payable arising from an import purchase should be reported on the balance sheet in home country currency at

a revalued amount to reflect the change in foreign currency exchange rate since the date of purchase.

The value of the euro can best be described as being

allowed to float freely against other currencies.

The exchange rate mechanism for the U.S. dollar can best be described as being

allowed to float independently of central bank intervention.

A transaction exposure to foreign exchange risk exists when an exporter

allows a foreign customer to pay in a foreign currency and allows the customer time to pay for its purchases.

In accounting for a foreign currency option used as a cash flow hedge of a foreign currency denominated asset or liability, the change in the time value of the option is recognized as

an expense in net income over the life of the option.

When the U.S. dollar price for a foreign currency increases from one day to the next, the foreign currency is said to have

appreciated against the U.S. dollar.

When a balance sheet date falls between the date of a foreign currency denominated export sale and the date cash is collected on the foreign currency account receivable, the foreign currency account receivable is reported on the U.S. exporter's balance sheet

at a U.S. dollar amount to reflect the change in exchange rate since the date of sale.

When a forward contract is used to hedge a foreign currency firm commitment, hedge accounting requires the forward contract and the firm commitment to

be recognized on the balance sheet at their fair values.

Hedges of forecasted foreign currency-denominated transactions can be designated as a

cash flow hedge.

A decrease in the direct quote in U.S. dollars for a foreign currency from one day to the next means that the foreign currency has _____ against the U.S. dollar.

depreciated

When the U.S. dollar price for a foreign currency decreases from one date to the next, the foreign currency is said to have

depreciated against the U.S. dollar.

The amount recognized as cost of goods sold related to imported goods that are paid for in a foreign currency is

determined by the spot rate on the date of purchase with no further adjustments.

The premium paid to acquire a foreign currency option is

equal to the sum of the option's intrinsic value and time value.

The procedures required by IFRS and U.S. GAAP to account for foreign currency transactions are

essentially the same.

The foreign currency _____ rate is the price at which one currency can be traded for another currency.

exchange

The price at which foreign currency can be purchased with U.S. dollars is known as the

exchange rate.

A company anticipates that it will make a sale denominated in foreign currency to a regular foreign customer in six months. Even though the customer has not yet placed an order, the company acquires an option to sell the foreign currency when it is expected to be received. The option is a hedge of a(n)

forecasted foreign currency denominated transaction.

The _____ exchange rate is the price today at which a foreign currency can be purchased or sold at a specific date in the future.

forward

The exchange rate today at which a foreign currency can be purchased or sold on a specific future date is the

forward rate. forward is future spot is today

In accounting for a forward contract used as a cash flow hedge of a foreign currency denominated asset or liability, the original discount or premium on the forward contract is recognized

in net income over the life of the forward contract.

Amortization of a forward contract premium over the life of the forward contract results in a(n)

increase in net income.

In assessing hedge effectiveness, an entity may choose to designate only the _____ value of an option as the hedging instrument.

intrinsic

The premium paid to acquire a foreign currency option is determined by adding together the option's _____ value and its time value.

intrinsic

A company enters into a forward contract to sell foreign currency in the following year. This forward contract will have a positive fair value when the forward rate on the balance sheet date for a contract that matures on the same future date

is lower than the forward rate on the contract entered into.

When a derivative financial instrument is used to hedge a foreign currency firm commitment, the firm commitment

is recognized as an asset or liability at its fair value.

Amortization of a forward contract _____ over the life of the forward contract results in an increase in net income.

premium

To be highly effective, an option used to hedge a firm commitment to pay a supplier 1,000 euros in 90 days should give the option holder the right to

purchase 1,000 euros in 90 days.

A foreign currency option giving its holder the right to sell foreign currency in the future at a predetermined price is a

put option. put is sale call is purchase

When a derivative financial instrument is used for speculation, the change in fair value of the derivative is

recognized as a gain or loss in net income.

A company makes a credit sale denominated in a foreign currency. On the date of sale the company enters into a forward contract to sell the foreign currency when it is received. The forward contract is a hedge of a(n)

recognized foreign currency denominated asset.

When an option is used to hedge a forecasted foreign currency denominated transaction, the change in fair value of the option from its date of acquisition to the balance sheet date is

reported as a change in other comprehensive income.

Foreign currency payables and receivables must be _____ at the balance sheet date to reflect changes in foreign exchange rates.

revalued

A foreign currency call option gives the holder of the option the

right but not the obligation to purchase foreign currency at a predetermined price.

The change in fair value of a derivative used for _____ purposes must always be recognized in net income.

speculative

The intrinsic value of a put option to sell foreign currency is determined by the difference in the option's strike price and

the current spot rate for that foreign currency.

The cumulative change in fair value of a hedging instrument used to hedge a forecasted foreign currency denominated transaction is transferred from accumulated other comprehensive income to net income on the date that

the forecasted transaction was originally projected to occur.

The original discount (or premium) on a forward contract is determined by the difference in the spot rate on the date the forward contract is signed and

the forward rate on the date the forward contract is signed.

When a company allows a foreign customer to pay in a foreign currency and allows the customer time to pay for its purchases the company has a _____ exposure to foreign exchange risk.

transaction

A company accepts a sales order from a foreign customer and will receive payment in foreign currency when it ships goods to the foreign customer in three months. On the date the order is accepted, the company enters into a forward contract to sell the foreign currency when it is received. The forward contract is a hedge of a(n)

unrecognized foreign currency firm commitment.

On its exercise date, the spot rate exceeds the strike price on an option to sell foreign currency. The option has a value of _____.

zero

The current spot rate to sell a foreign currency is $1.00. The intrinsic value of an option to sell that foreign currency at a strike price of $0.90 is

zero; the option has no intrinsic value.

The up-front price a company pays its bank to enter into a foreign currency forward contract is

zero; there is no up-front cost to enter into a forward contract.