Question 1

The forward rate may be defined as
A)The price a foreign currency can be purchased or sold today.
B)The price today at which a foreign currency can be purchased or sold in the future.
C)The forecasted future value of a foreign currency.
D)The U.S. dollar value of a foreign currency.
E)The Euro value of a foreign currency.

Accepted Answer

The forward rate refers to the price today at which a foreign currency can be purchased or sold at a future date. It represents an agreement made today to exchange one currency for another at a future date. The forward rate is different from the spot rate, which is the current exchange rate between two currencies.

Question 2

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2013 at a
A)forward contract discount $600.
B)forward contract premium $600.
C)forward contract discount $980.
D)forward discount premium $980.
E)There is no premium or discount because the fair value of the contract is zero.

Accepted Answer

The forward rate on December 16, 2013, was $0.00098, which is higher than the spot rate of $0.00092, indicating a forward contract premium. The premium is calculated as (0.00098 - 0.00092) * 10,000,000 = $600.

Question 3

A spot rate may be defined as
A)The price a foreign currency can be purchased or sold today.
B)The price today at which a foreign currency can be purchased or sold in the future.
C)The forecasted future value of a foreign currency.
D)The U.S. dollar value of a foreign currency.
E)The Euro value of a foreign currency.

Accepted Answer

A

Question 4

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction?
A)$500 (gain).
B)$500 (loss).
C)$200 (gain).
D)$200 (loss).
E)$- 0 -

Accepted Answer

The exchange rate decreased from $0.00092 on December 16 to $0.00090 on December 31, resulting in a loss. The difference is $0.00002 per won, leading to a loss of $200 (10 million won x $0.00002).

Question 5

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$$ How much U.S. $ will it cost Brisco to finally pay the payable on June 7?
A)$1,666,667.
B)$2,440,000.
C)$2,520,000.
D)$2,500,000.
E)$2,400,000.

Accepted Answer

On June 7, the spot rate is $1.20 per FC. Therefore, the cost in U.S. dollars is 2,000,000 FC * $1.20 = $2,400,000.

Question 6

Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle. At what amount should inventory be reported?
A)$0.
B)$28,000.
C)$24,000.
D)$25,000.
E)$2,000.

Accepted Answer

$.28 × §100,000 = $28,000

Question 7

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$$ What amount of foreign exchange gain or loss should be recorded on January 30?
A)$1,516 gain.
B)$1,516 loss.
C)$575 loss.
D)$500 loss.
E)$500 gain.

Accepted Answer

The answer of Norton Co., a U.S. corporation, sold inventory...

Question 8

Which statement is true regarding a foreign currency option?
A)A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.
B)A foreign currency option gives the holder the obligation only sell foreign currency in the future.
C)A foreign currency option gives the holder the obligation to only buy foreign currency in the future.
D)A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future.
E)A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.

Accepted Answer

A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future. It's a contract that gives the holder the right, but not the obligation, to buy or sell a specified amount of foreign currency at a predetermined price (called the strike price) on or before a specified date.

Question 9

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.
A)$700 (gain).
B)$700 (loss).
C)$300 (gain).
D)$300 (loss).
E)$297 (gain).

Accepted Answer

The forward contract locks in the exchange rate at $.00098, which is higher than the spot rate of $.00092 on December 16, 2013. This means that Car Corp. will receive more U.S. dollars for the Korean won when the payment is received on January 15, 2014. The net impact on Car Corp.'s 2013 income statement is a gain of $297, which is calculated as follows:Gain = (Forward rate - Spot rate) x Amount of Korean wonGain = ($.00098 - $.00092) x 10,000,000Gain = $.00006 x 10,000,000Gain = $297

Question 10

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$$ How much Foreign Exchange Gain or Loss should Brisco record on May 31?
A)$2,520,000 gain.
B)$20,000 gain.
C)$20,000 loss.
D)$80,000 gain.
E)$80,000 loss.

Accepted Answer

The answer of Brisco Bricks purchases raw material from its...

Question 11

Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?
A)$71,428.
B)$76,924.
C)$588.
D)$582.
E)$0, since there is no cost, there is no value for the contract at this date.

Accepted Answer

Forward Contract Not Recorded at Date of Sale

Question 12

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { May 8 } & \text { Spot rate: } & \$ 1.25 \
\hline \text { May 31 } & \text { Spot rate: } & \$ 1.26 \
\hline \text { Jun. 7 } & \text { Spot rate: } & \$ 1.20 \
\hline
\end{array}$$ For what amount should Brisco's Accounts Payable be credited on May 8?
A)$2,500,000.
B)$2,440,000.
C)$1,600,000.
D)$1,639,344.
E)$1,666,667.

Accepted Answer

The answer of Brisco Bricks purchases raw material from its...

Question 13

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2014 income statement related to this transaction?
A)$500 (gain).
B)$303 (gain).
C)$300 (gain).
D)$300 (loss).
E)$0.

Accepted Answer

The answer of Car Corp. (a U.S.-based company) sold parts...

Question 14

Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills' 2013 consolidated income statement, how much should have been reported as a foreign exchange gain?
A)$0.
B)$36,000.
C)$48,000.
D)$10,000.
E)$12,000.

Accepted Answer

$144,000 - $132,000 = $12,000 Gain

Question 15

On June 1, CamCo received a signed agreement to sell inventory for ×500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ×1 = $.004167, and the 90-day forward rate was ×1 = $.00427. At what amount would CamCo record the Forward Contract on June 1?
A)$2,083.
B)$0.
C)$2,110.
D)$2,532.
E)$2,135.

Accepted Answer

Forward Contract Not Recorded at Date of Sale

Question 16

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was entered into, at what amount should the forward contract be recorded at December 31, 2013? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.
A)$200.
B)$295.
C)$495.
D)$500.
E)$9,300.

Accepted Answer

The answer of Car Corp. (a U.S.-based company) sold parts...

Question 17

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$$ For what amount should Sales be credited on December 1?
A)$5,500.
B)$16,949.
C)$18,182.
D)$17,241.
E)$16,667.

Accepted Answer

Sales should be credited at the spot rate on the date of the transaction, which is December 1. The spot rate on December 1 is $1.7241 per British pound. Therefore, the sales amount is 10,000 pounds * $1.7241 = $17,241.

Question 18

Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2013. Pigskin received payment of 35,000 British pounds on May 8, 2013. The exchange rate was ≤1 = $1.54 on April 8 and ≤1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)
A)$10,500 loss
B)$10,500 gain
C)$1,750 loss
D)$3,850 loss
E)No gain or loss should be recognized.

Accepted Answer

$1.43 - $1.54 = ($.11) × ≤35,000 = ($3,850) Loss

Question 19

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: $$\begin{array} { | l | l | l | } 
\hline \text { Dec 1 } & \text { Spot rate: } & \$ 1.7241 \
\hline \text { Dec. 31 } & \text { Spot rate: } & \$ 1.8182 \
\hline \text { Jan. 30 } & \text { Spot rate: } & \$ 1.6666 \
\hline
\end{array}$$ What amount of foreign exchange gain or loss should be recorded on December 31?
A)$300 gain.
B)$300 loss.
C)$0.
D)$941 loss.
E)$941 gain.

Accepted Answer

The foreign exchange gain or loss is calculated based on the change in exchange rates from the transaction date to the reporting date. On December 1, the rate was $1.7241, and on December 31, it was $1.8182. The change is $0.0941 per pound. For 10,000 pounds, the gain is 10,000 * $0.0941 = $941.

Question 20

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: $\begin{array}{lrr}&&\text { Forward }\
&\text { Spot}&\text {  Rate }\
\text { Date }&\text { Rate}&\text { to Jan. } 15\
\hline\text { December 16, 2013 } & \$ .00092 & \text { \$. } 00098 \
\text { December 31, 2013 } & .00090 & .00093 \
\text { January 15, 2014 } & .00095 & .00095
\end{array}$ Assuming a forward contract was entered into, how would the forward contract be reflected on Car's December 31, 2013 balance sheet?
A)Forward contract (asset).
B)Forward contract (liability).
C)Foreign currency (asset).
D)Foreign currency (liability).
E)Foreign exchange (liability).

Accepted Answer

The forward contract is an asset because it gives Car Corp. the right to buy Korean won at a fixed rate in the future. This right has value because it protects Car Corp. from the risk that the Korean won will appreciate against the U.S. dollar before January 15, 2014.

Quiz 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

The forward rate may be defined as

A spot rate may be defined as

Which statement is true regarding a foreign currency option?