680 Chapter 13 10. In which of the following instances would the holder of the instrument recognizes gain when the market rate or price increases? a. Futures contract where the holder is in the short position. b. Forward contract to sell foreign currency units c. "Receive fixed, pay variable" interest rate swap d. "Receive variable, pay fixed" interest rate swap PROBLEM 3: EXERCISES 1. On December 1, 20x1, Stair Box Co. enters into a 45-day forward contract to buy 1,000 kilograms of coffee beans at a forward price of P250 per kilogram. The market prices in the subsequent periods are as follows: December 31, 20x1.. .P285 January 15, 20x2. ...P245 Requirements: Provide the journal entries under each of the following scenarios: (a) the contract is settled by the actual purchase of the commodity, i.e., inventory; and (b) the contract is settled through net cash payment. 2. On December 15, 20x1, Star Glass Co. entered into a 30-day forward contract to buy 10,000 yens at the forward rate of P1.50. On December 31, 20x1, the forward rate was P1.25 and by January 15, 20x2, the spot rate moved to P1.60. Requirements: Provide the journal entries under each of the following scenarios: (a) the contract is settled by the actual purchase of yens; and (b) the contract is settled through net cash payment.Basic Derivatives 679 6. An entity acquires futures contract for 1,000 units of a commodity. The futures price at contract inception is P80 per unit. The current price on settlement date is P90. Which of the following statements is correct? If the entity is in the.... the entity will recognize a. Short position Gain. b. Long position Gain. c. Long position Loss. d. Wrong position None. 7. Classic Co. enters into a "short" futures contract during the period. The futures contract will be settled net in the following period. At the reporting date, Classic Co. recognizes a gain on the futures contract. Which of the following statements is correct? a. Classic Co.'s current period statement of financial position will include a derivative liability for the futures contract. b. Prices have increased. c. Prices have decreased. d. a and c 8. If the strike price in a call option contract exceeds the current price, the option is considered a. In the money. c. At the money. b. Out of the money. d. No money, no honey. 9. In which of the following instances would the holder of the instrument recognizes loss when the market rate or price decreases? a. Futures contract where the holder is in the long position. b. Forward contract to purchase a specified quantity of a commodity. c. Call option d. Put optionPROBLEMS PROBLEM 1: TRUE OR FALSE 1. An increase in prices would result to the recognition of a gain in a "short" futures contract. 2. If the market price exceeds the strike price in a put option contract, the option is said to be in the money. 3. The maximum amount of loss in an option contract that is not designated as a hedging instrument is equal to the acquisition cost of the option. 4. Dogs Co. enters into a futures contract. At the inception, Dogs Co. pays a deposit to the broker. The deposit forms part of the carrying amount of the derivative instrument. 5. Howl Co. acquires an option. Howl Co. pays an amount for the option. The payment forms part of the carrying amount of the derivative instrument. 6. According to PFRS 9, all derivatives shall be measured at fair value. 7. Derivatives that are not designated as hedging instruments are accounted for as held for trading securities. All subsequent changes in the fair value of the derivative is recognized in profit or loss. 8. Entity A enters into a foreign currency swap. Entity A does not designate the swap as a hedging instrument. The gain or loss on the measurement of the swap at each reporting date shall be recognized in profit or loss. 9. Entity X enters into a forward contract to buy 1,000 foreign currencies at a forward rate of P1.00. At the reporting date, the forward rate is P1.50. Entity X will recognize a gain of P500 on the forward contract. 10. Entity Y enters into a forward contract to buy 1,000 foreign currencies at a forward rate of P2.00. At settlement date, the spot rate increases to P3.00. On the net settlement of the forward contract, Entity Y receives a net cash payment of P1,000.678 Chapter 13 PROBLEM 2: MULTIPLE CHOICE - THEORY 1. Which of the following is not a characteristic of a derivative? a. It is settled at a future date b. It derives its value from the changes in value of some other notional amount. c. It requires no initial net investment or only a very minimal initial net investment d. All of these are valid characteristics of a derivative. 2. Which of the following can be an underlying for a derivative? a. temperature or climate c. interest or exchange rate b. specified price d. all of these 3. Entity X enters into a forward contract to sell 1,000,000 foreign currency units at a forward rate of P0.50. At the reporting date and on settlement date, the current rates are P0.48 and P0.52, respectively. Identify the notional amount and the underlying in the contract. Notional amount Underlying a. P0.50 1,000,000 b. 1,000,000 Foreign currency C. 1,000,000 Forward rates d. P0.50, PO.48 and P0.52 1,000,000 4. It is an agreement between two parties to exchange a specified amount of a commodity, security, or foreign currency at a specified date in the future at a pre-agreed price. It is most likely an over-the-counter transaction rather than a standardized and traded instrument. a. Forward contract c. Backward contract b. Futures contract d. Pasts contract 5. Which of the following derivatives is most likely to be settled on a net cash basis? a. Forward contract c. Call option b. Futures contract d. Put option