1.Which of the following is not among the characteristics of a derivative?

1. it must have at least two or more notional amounts
2. its value changes in response to the change in an underlying
3. it requires no initial net investment or only a very minimal initial net investment
4. it is settled at a future date

2.Which of the following can be an underlying for a derivative?

a. temperature or climatec. interest or exchange rate

b. specified priced. all of these

3.Which of the following can be a notional amount for a derivative?

a. share pricec. number of currency units

b. interest rated. exchange rate

4.Entity X enters into a forward contract to sell 1,000,000 foreign currency units at a forward rate of 0.50. At the reporting date and on settlement date, the current rates are 0.48 and 0.52, respectively. Identify the notional amount and the underlying in the contract.

Notional amountUnderlying

1. 0.501,000,000
2. 1,000,000 currency unitsForeign currency
3. 1,000,000 currency unitsForward rates
4. 0.50, 0.48 and 0.521,000,000

Use the following information for the next two questions:

ABC Co. expects the value of the won to increase in the next 30 days. Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day forward contract to buy 10,000 wons at the forward rate of 1.24. On December 31, 20x1, the forward rate was 1.27 and by January 15, 20x2, the spot rate moved to 1.30.

5.How much is the carrying amount of the derivative on December 31, 20x1?

a.0c. 300 liability

b.300 assetd. 1,400 asset

6.How much is the net cash settlement on January 15, 20x1?

a.300 receiptc. 600 receipt

b.300 paymentd. 600 payment

Use the following information for the next two questions:

On December 1, 20x1, ABC Co. enters into a futures contract to sell 10,000 units of a commodity on January 31, 20x2 for 100 per unit. The broker requires an initial margin deposit of 10,000. The quoted prices per unit are as follows:

Dec. 1, 20x1

Dec. 31, 20x1

Jan. 31, 20x2

100

98

97

7.How much is the gain (loss) on the remeasurement of the derivative on December 31, 20x1?

a.10,000 gainc. 20,000 loss

b.20,000 gaind. 0

8.How much is the net cash settlement on January 31, 20x1?

a.30,000 receiptc. 40,000 receipt

b.30,000 paymentd. 40,000 payment

9.Drive Co. acquires a call option on 1,000 units of a commodity at a strike price of 100 for 400 on March 1, 20x1. The call option is exercisable on July 1, 20x1. The movements in prices are shown below:

Mar. 1, 20x1

June 30, 20x1

Spot prices

100

120

Time value of option

400

100

How much is the net cash settlement on January 31, 20x1?

a.20,000 receiptc. 20,100 receipt

b.20,000 paymentd. 20,100 payment

10.Tuba Co. enters into a "receive variable, pay fixed" interest swap on January 1, 20x1 for a notional amount of 1,000,000. Under the terms of the contract, if the current rate increases above 12% (i.e., the set rate), Tuba Co. shall receive the excess interest. If the current rate falls below 12%, Tuba Co. shall pay the deficiency. Swap payment shall be made on December 31, 20x2. The current rates are as follows:

Jan. 1, 20x1.................................12%

Jan. 1, 20x2.................................15%

How much is the carrying amount of the derivative on December 31, 20x1?

a.30,0000 liabilityc. 26,087 asset

b.30,000 assetd. 26,087 liability