Share
Explore BrainMass

Hedging, Foreign Currency and Derivatives

1. A foreign currency transaction gain will be recognized by a U.S. company when it has a receivable from a foreign company
a. denominated in dollars and the foreign currency weakens relative to the dollar before payment is received.
b. denominated in foreign currency and the foreign currency strengthens relative to the dollar before payment is received.
c. denominated in dollars and the foreign currency strengthens relative to the dollar before payment is received.
d. denominated in foreign currency and the foreign currency weakens relative to the dollar before payment is received.

2. On October 1, 2008, a U.S. company acquired goods from a Japanese company for 840,000 yen, payable in yen on April 1, 2009. Spot rates on various dates follow:
Transaction date 100.0 yen = 1 US dollar
Balance Sheet date (12/31/08) 87.5 yen = 1 US dollar
Settlement date 120.0 yen = 1 US dollar

As a result of this transaction, the U.S. company has a foreign currency transaction gain (loss) in 2008 and 2009 of (rounded):

2008 2009
a. $(1,200) $2,600
b. $1,400 $1,200
c. $1,200 $(2,600)
d. $(1,200) $1,400

3. The transaction gain or loss to be recognized over the term of a forward exchange contract entered into to speculate in a foreign currency within a fiscal year is measured by the difference between the
a. spot rate at inception of the contract and forward rate at inception of the contract.
b. spot rate at inception of the contract and spot rate at settlement of the contract.
c. forward rate at inception of the contract and spot rate at settlement of the contract.
d. forward rate at inception of the contract and forward rate at settlement of the contract.

4. Bowman Company reported translation adjustments in its stockholders' equity section of $2,000,000. These adjustments were added to the other items disclosed in Bowman's stockholders' equity. Bowman's translation adjustments resulted from its 80% interest in the capital stock of a Danish subsidiary. Based upon the facts presented, which of the following statements is true?
a. The credits in dollars on the Danish trial balance exceeded the debits in dollars by $2,000,000.
b. The debits in dollars on the Danish trial balance exceeded the credits in dollars by $2,000,000.
c. The debits in dollars on the Danish trial balance exceeded the credits in dollars by $2,500,000.
d. The credits in dollars on the Danish trial balance exceeded the debits in dollars by $2,500,000.

5. On November 1, Year One, the Haynie Company signs a contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). This contract is a derivative because its value is derived from the future value of the Japanese yen in relation to the US dollar. On December 31, Year One, the Haynie Company is producing financial statements. How is this forward exchange contract reported?
a. It is shown as an asset or a liability at its fair value.
b. It is shown only as an asset at its fair value.
c. It is shown only as a liability at its fair value.
d. It is only disclosed in the notes to the financial statements because it is a future transaction.

6. On November 1, Year One, the Abernethy Company signs a forward exchange contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). On that same day, Abernethy agrees to acquire inventory for one million yen when it is delivered on February 1, Year Two. The forward exchange receivable is designated as a hedge for this commitment. On November 1, the spot (current) exchange rate is $1 for 94 Japanese yen but that rate change, by December 31, to $1 for 96 Japanese yen. As of December 31, Year One, the forward exchange rate to be paid one month in the future is $1 for 103 Japanese yen. What is the overall impact to be recognized on net income at the end of Year One?
a. -$0-
b. $71 loss
c. $221 gain
d. $292 loss

7. Near the end of the Year One, a company buys two derivatives that will come due in the next year. One of these derivatives was properly designed as a cash flow hedge. The other derivative was properly designed as a fair value hedge. By the end of the year, the fair value of both of these derivatives had increased. Where will these gains be reported?
a. In net income for both hedges
b. In accumulated other comprehensive income for both hedges
c. In net income for the fair value hedge and in accumulated other comprehensive income for the cash flow hedge.
d. In net income for the cash flow hedge and in accumulated other comprehensive income for the fair value hedge.

Solution Preview

1. A foreign currency transaction gain will be recognized by a U.S. company when it has a receivable from a foreign company
b) denominated in foreign currency and the foreign currency strengthens relative to the dollar before payment is received
ex. if the receivable = 1000 FC and at the sale date 1FC= 1US$ that becomes later 1FC=1.5 US$ ( that is the meaning of the foreign currency strengthens relative to the dollar before payment is received) than the US$ amount of the receivable goes from $1000 to $1500, that is an increase of a receivable, then a transaction gain.

2. On October 1, 2008, a U.S. company acquired goods from a Japanese company for 840,000 yen, payable in yen on April 1, 2009. Spot rates on various dates follow:
Transaction date 100.0 yen = 1 US dollar, So 840,000 yen = $8,400
Balance Sheet date (12/31/08) 87.5 yen = 1 US dollar , i.e., 840,000 yen = $9,600 that is a loss (increase of debt) of $1,200 for 2008
Settlement date 120.0 yen = 1 US dollar , i.e., ...

Solution Summary

Multiple Choice Questions.
Ex. The transaction gain or loss to be recognized over the term of a forward exchange contract entered into to speculate in a foreign currency within a fiscal year is measured by the difference between the forward rate at inception of the contract and spot rate at settlement of the contract.

$2.19