Deck 14: Using Derivatives to Manage Foreign Currency Exposures

Question 1

Companies manage their foreign currency exposures by a technique called _____________________________________.

Answer 1

hedging

Question 2

The three categories of foreign currency exposures that can be managed are (a)____________________________________, (b) ___________________________________, and (c) _______________________________.

Answer 2

existing assets and liabilities, firm commitments, forecasted transactions

Question 3

Hedging a noncancellable sales order is a hedge of a(n) _________________________ ____________________ anticipatory transaction.

Answer 3

firm commitment

Question 4

Hedging budgeted export sales is a hedge of a(n) _______________________________ transaction.

Question 5

A specific foreign currency exposure being hedged is commonly called the ______________________________________.

Question 6

The financial instrument used to achieve the hedge is commonly called the _________________________________________.

Question 7

The two most commonly used hedging instruments to hedge foreign currency exposures are (a) ____________________________ and (b) __________________________.

Question 8

FX forwards result in a(n) _____________________________ hedge because both the downside risk and the upside potential on the hedged item are ______________________________.

Question 9

FX options result in a(n) ________________________________ hedge because only the downside risk on the hedged item is ______________________________________.

Question 10

______________________________ is a special accounting treatment that achieves both (a) counterbalancing and (b) either concurrent recognition or concurrent deferral of mark-to-market adjustments.

Question 11

In an FX option, one party has the contractual right to buy or sell a specific quantity of currency at a(n) _______________________ during a(n) _______________________.

Question 12

An option to buy is a(n) _____________________________________. An option to sell is a(n) ____________________________________.

Question 13

The party having the contractual right is the _________________________________.

Question 14

The party having the obligation to honor the option contract is the _________________________________.

Question 15

The price paid to acquire an option is called the _______________________________.

Question 16

An option worth exercising is said to be ______________________________________.

Question 17

Split accounting in the context of options refers to accounting for the ____________________________________ separately from the ________________________________.

Question 18

An FX forward is an agreement to buy or sell a foreign currency (technically exchange different currencies) at a specified ______________________________ and at a specified ________________________________________.

Question 19

In an FX forward, each party must _________________________________________ its _________________________________________ at the expiration date.

Question 20

In an FX forward to buy a foreign currency, the buyer must ________________________________________________ delivery at the expiration date.

Question 21

FX forwards are _________________________________________ in nature.

Question 22

Adjustments to FX forwards at intervening financial reporting dates are ____________________________________ FX gains and losses.

Question 23

The fair value of the obligations of each party in a forward exchange contract are usually reported at __________________________________________ in the balance sheet because of the legal right of __________________________________________.

Question 24

The difference between the spot rate and the forward rate is called a(n) ____________________________________ or a(n) __________________________________ and is viewed as being a(n) ______________________________________ element.

Question 25

Entering into an FX forward to buy a foreign currency at more than the spot rate will result in a(n) _________________________________________ that will eventually _________________________________ stockholders' equity.

Question 26

Accounting for premiums and discounts separately from the intrinsic value is called ______________________________________.

Question 27

For an FX forward to qualify as a hedge of a firm foreign-currency-denominated commitment, the FX forward must be ____________________________________ as a hedge, be _____________________________________, and the foreign currency commitment must be _____________________________________.

Question 28

Entering into an FX forward for purposes other than hedging is ________________ _____________________________________.

Question 29

Entering into an FX forward prior to the delivery date would be a hedge of either a(n) _________________________________ or a(n) _________________________________.

Question 30

The three types of risk associated with derivatives are _________________________ risk, _____________________________ risk, and ______________________________risk.

Question 31

In a derivative, the party that is in a receivable position has both _________________________________ risk and ________________________________ risk.

Question 32

In a derivative, the party that is in a payable position has both _________________________________ risk and ________________________________ risk.

Question 33

In a derivative, the party that either is in a payable position or can go into a payable position has __________________________________________ market risk.

Question 34

Market risk can consist of both _________________________________________ risk and ____________________________________ risk.

Question 35

Derivative financial instruments are contracts that create ____________________ and ________________________ that meet the definitions of ____________________ and ________________________.

Question 36

All derivatives are valued in the balance sheet at their ________________________.

Question 37

Gains and loses on derivatives cannot be deferred and reported as ______________ ______________and _______________________________.

Question 38

The four types of hedging categories that exist are (1) _____________________ hedges (hedges that do not qualify as hedges in any of the following three categories), (2) _______________________ hedges, (3) _________________________ hedges, (4) ________________________ hedges.

Question 39

In a fair value hedge, the concern is that a loss will be incurred (1) on an existing ______________________________ or ______________________________ or (2) on a _________________________

Question 40

In a cash flow hedge, the concern is that an adverse cash flow result will occur on a _________________________.

Question 41

Hedging a firm commitment is generally a __________________________ hedge.

Question 42

Hedging a forecasted transaction is generally a __________________________ hedge.

Question 43

Hedging an investment in a foreign subsidiary is a _______________________ hedge.

Question 44

FX gains and losses on fair value hedges are reported in ______________________ when they arise.

Question 45

FX gains and losses on cash flow hedges are reported in _______________________ when they arise and later reported in _____________________________________.

Question 46

In a cash flow hedge, amounts initially reported in Other Comprehensive Income are reclassified to ________________________________ when the transaction on the hedged item is reported in _______________________________.

Question 47

All FX forwards are valued using the change in the ____________________________ exchange rate.

Question 48

Split accounting encompasses both (1) the manner of _________________________ a derivative and (2) the manner of _____________________________ the change in a derivative's carrying value.

Question 49

Split accounting comes into play in determining how to assess __________________ __________________.

Question 50

In assessing hedge effectiveness, the change in a derivative's carrying value attributable to the change in the derivative's _______________________________ element may or may not be used.

Question 51

Reporting in earnings currently is mandatory for that portion of a derivative's FX gain that is determined to be ______________________________.

Question 52

Companies can hedge firm commitments but not forecasted transactions.

Question 53

Companies can hedge strategic or competitive exposures.

Question 54

Hedging and hedge accounting are synonymous terms.

Question 55

Hedging a foreign currency payable is protecting against the loss of a forecasted transaction.

Question 56

Hedging a foreign currency receivable is protecting against the loss on a forcasted transaction.

Question 57

Hedging a domestic company's budgeted export sales is a strategic hedge.

Question 58

Hedging a domestic company's budgeted export sales is a hedge of a forecasted transaction.

Question 59

Not all anticipatory transactions are firm commitments.

Question 60

An expected future sale that is under contract would be considered a forecasted transaction.

Question 61

An expected future sale that is not under contract would be considered a forecasted transaction.

Question 62

Hedging a domestic company's budgeted import purchases to the extent of orders placed could be hedges of firm commitments.

Question 63

Hedging a domestic company's budgeted export sales is always a hedge of a firm commitment.

Question 64

Hedging the potential loss of domestic sales because of an expected weakening of a foreign currency would be a strategic hedge.

Question 65

Hedging the potential loss of budgeted export sales because of an expected weakening of a foreign currency would be a hedge of a forecasted transaction.

Question 66

Hedging a domestic company's budgeted export sales is a strategic hedge.

Question 67

Hedging a domestic company's budgeted export sales is a hedge of a forecasted transaction.

Question 68

Hedging a domestic company's budgeted export sales is a hedge of a firm commitment.

Question 69

FX forwards and FX options can be used as hedged items.

Question 70

Hedge accounting is required whenever FX forwards are used.

Question 71

Hedge accounting is optional if FX options are used.

Question 72

Hedge accounting is not defined as accounting for the time value element separately from the intrinsic value element of the hedging instrument.

Question 73

Hedge accounting is defined as accounting for the time value element in a manner consistent with accounting for the intrinsic value element of the hedging instrument.

Question 74

Hedge accounting is defined as accounting for mark-to-market adjustments on the hedged item in the same manner as accounting for mark-to-market adjustments on the hedging instrument.

Question 75

In an FX option written by an FX trader, the FX trader always has a contractual obligation to deliver a foreign currency to the option holder if the option holder exercises the option.

Question 76

In a foreign currency option, the option writer has potential loss exposure-not the option holder.

Question 77

An option to buy is referred to as a "call."

Question 78

An option to sell is referred to as a "put."

Question 79

Options have premiums but not discounts.

Question 80

Options that are "out of the money" have no intrinsic value.