ACCGOV - FOREX

Which of these considerations would not be relevant in determining the entity’s functional currency?

• The currency that influences the costs of the entity

• The currency in which finance or fund is generated

• The currency in which receipts from operating activities are retained

• The currency that is the most internationally acceptable for trading

Which of the following is not a distinguishing characteristic of a derivative instrument?

• Terms that require or permit net settlement

• Must be “highly effective” throughout its life

• No initial investment

• One or more underlyings and notional amounts

The basic purpose of derivative financial instruments us to manage some kind of risk such as all of the following except

• Share price movement

• Interest rate variation

• Currency fluctuation

• Uncollectibility of accounts receivable

The currency of Brazil:

• Brazilian dollar

• Brazilian real

• Franc

• Pound

According to the PDS rate, the closing rate of USD:PHP as of March 21 is:

• 51.10

• 49.50

• 52.15

• 50.10

On July 1, 2017, Vir Company lent P120,000 to a foreign supplier, evidenced by an interest-bearing note due on July 1, 2018. The note is denominated in the currency of the borrower and was equivalent to 840,000 local currency units (LCU) on the loan date. The note principal was appropriately included at P140,000 in the receivable section of Vir’s December 31, 2017 balance sheet. The note principal was repaid to Vir on the July 1, 2018 due date when the exchange rate was 8 LCU to P1. In its income statement for the year ended, December 31, 2018, what amount should Vir include as a foreign currency transaction gain or loss?

• 0

• 15,000 loss

• 15,000 gain

• 35,000 loss

On September 1, 2017, Ramus Company purchased machine parts from Jacky Chan Company for 6,000,000 Hong Kong dollars to be paid on January 1, 2018. The exchange rate on September 1 is HK$7.7 = P1. On the same date, Ramus enters into a forward contract and agrees to purchase HK$6,00,000 on January 1,2018 at the rate of HK$7.7 = P1. On December 31, 2017 and on January 1,2018, the exchange rate is HK$8.0 = P1.

• 0

• 29,221

• 750,000

• 779,221

On June 18, Loma Corporation entered into a firm commitment to purchase specialized equipment from the Okazaki Trading Company for Y80,000,000 on August 20. The exchange rate on June 18 is Y100 = P1. To reduce the exchange rate risk that could increase the cost of the equipment in pesos. Loma pays P12,000 for a call option contract. This contract gives Loma the option to purchase Y80,000,000 at an exchange rate of Y100 = P1 on August 20. On August 20, the exchange rate is Y93 = P1. How much did Loma save by purchasing the call option?

• 12,000

• 48,215

• 60,215

• Loma would have been better off not to have purchased the call option.

An entity enters into a call option contract with an investment bank on December 31, 2017. This contract gives the entity the option to purchase 10,000 shares at P100 per share. The option expires on April 30, 2018. The shares are trading at P100 per share on December 31, 2017 at which the entity pays P40,000 for the call option. The P40,000 paid by the entity to the investment bank is referred to as

• Option premium

• Notional amount

• Strike price

• Intrinsic value

Which of the following risk is inherent in an interest rate swap agreement?

I. The risk of exchanging a lower interest rate for a higher interest rate.

II. The risk of nonperformance by the counterparty to the agreement.

• I only

• II only

• Both I and II

• Neither I nor II