1. The definition of a derivative requires which of the following characteristics to be met?

I its value must change in response to a change in an underlying variable such as a specified interest rate, price or foreign exchange rate.

II it must be settled on a net basis

III it must require no initial net investment or an additional net investment that is smaller than would be required for other types of contracts with similar responses to changes in market factors.

IV it is to be settled at a future date

Select one:

a. I II and III

b. I II and IV

c. I III and Iv

2. Which of the following is NOT a condition for hedge accounting to be applied?

Select one:

a. The hedge must be expected to be effective

b. The effectiveness of the hedge must be able to be reliably measured.

c. There must be formal designation and documentation of the hedging relationship at the inception of the hedge.

d. For cash flow hedges, the forecast transaction must be highly probable.

3. Company A issues preference shares to Company B, the terms of which entitle party B to redeem the preference shares for cash if Company As revenues fall below a specified level. From Company As perspective the preference shares are:

Select one:

a. an equity instrument

b. a financial liability

c. a financial asset

d. a compound financial instrument

4. Company A has convertible notes on issue. These notes are convertible to ordinary shares of the Company after 3 years. The distributions made to the note holders by Company A are classified by Company A as follows:

Select one:

a. a portion representing interest expense and a portion representing dividends distributed

b. dividend distributed

c. realised losses

d. interest expense

5. On March 1, Suki Corporation entered into a firm commitment to purchase specialized equipment from the Sashimi Trading Company for 80,000,000 on June 1. The exchange rate on March 1 is 100 = $1. To reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars, Suki pays $20,000 for a call option contract. This contract gives Suki the option to purchase 80,000,000 at an exchange rate of 100 = $1 on June 1. On June 1, the exchange rate is 105 = $1. How much did Suki save by purchasing the call option (answers rounded to the nearest dollar)?

Select one:

a. $20 000

b. $47 619

c. Suki would have been better off not to have purchased the call option.

d. $27 619

6. For which type of derivative are changes in the fair value deferred and recognized as an equity adjustment?

Select one:

a. operating hedge

b. cash flow hedge

c. fair value hedge

d. notional value hedge

7.Bingo, Inc., enters into a call option contract with Racer Investment Co. on January 2, 2014. This contract gives Bingo the option to purchase 1,000 shares of Saloon stock at $100 per share. The option expires on April 30, 2014. Saloon shares are trading at $100 per share on January 2, 2014, at which time Bingo pays $100 for the call option. Assume that the price per share of Saloon stock is $115 on April 30, 2014, and that the time value of the option has not changed. In order to settle the option contract, Bingo, Inc., would most likely

Select one:

a. pay Racer Investment $15,000.

b. receive $15,000 from Racer Investment.

c. receive $400 from Racer Investment.

d. purchase the shares of Saloon at $100 per share and sell the shares at $115 per share to Racer.

8. On July 1, 2014, Stagger Company sold some limited edition art prints to Wakaramas Company for 38,500,000 to be paid on September 30 of that year. The current exchange rate on July 1, 2014, was 110=$1, so the total payment at the current exchange rate would be equal to $350,000. Stagger entered into a forward contract with a large bank to guarantee the number of dollars to be received. According to the terms of the contract, if 38,500,000 is worth less than $350,000, the bank will pay Stagger the difference in cash. Likewise, if 38,500,000 is worth more than $350,000, Stagger must pay the bank the difference in cash.

Using the information above and assuming the exchange rate on September 30 is 115=$1, what amount will Stagger pay to, or receive from, the bank (rounded to the nearest dollar)?

Select one:

a. $16 667 payment

b. $15 217 payment

c. $15 217 receipt

d. $16 667 receipt

9. On January 1, 2014, Panther Company received a two-year $600,000 loan. The loan calls for payments to made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at January 1, 2014, was 10 percent. Aegean company also has a two-year $600,000 loan, but Aegean's loan carries a fixed interest rate of 10 percent.

Panther Company does not want to bear the risk that interest rates may increase in year two of the loan. Aegean Company believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest rate swap agreement whereby Aegean agrees to make Panther's interest payment in 2015 and Panther likewise agrees to make Aegean's interest payment in 2015. The two companies agree to make settlement payments, for the difference only, on December 31, 2015. If the interest rate on January 1, 2015 is 8 percent, what will be Panther's settlement payment to/from Aegean?

Select one:

a. $12 000 payment

b. $6000 receipt

c. $6000 payment

d. $12 000 receipt

10. If a cannery wanted to lock in the price they would pay for peaches in August four months before harvest (in April of the same year), they would be most likely to enter into which kind of agreement?

Select one:

a. Futures contract

b. Fixed commodities contract

c. Interest rate swap

d. Option