ACCOUNTING FOR BUSINESS TRANSACTIONS-LETTERS ONLY

ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 1)

1.It is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

1. Price riskc. Credit risk
2. Market riskd. Liquidity risk

2.The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.

1. Price riskc. Credit risk
2. Market riskd. Liquidity risk

3.According to PFRS 7, it is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

1. Interest rate riskc. Fair value risk
2. Currency riskd. Other price risk

4.It is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

1. Price riskc. Credit risk
2. Market riskd. Liquidity risk

5.According to PFRS 7, it is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

1. Interest rate riskc. Fair value risk
2. Currency riskd. Other price risk

6.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.

1. forward contractc. swap
2. futures contractd. option

7.Which of the following contracts is not considered a derivative instrument?

1. futures contractc. option contract
2. forward contractd. lease contract

8.It is a contract in which two parties agree to exchange payments in the future based on the movement of some agreed-upon price or rate.

1. forward contractc. swap
2. futures contractd. option

9.It is a contract giving the holder the right, but not the obligation, to buy or sellan asset at a specified price any time during a specified period in the future.

1. forward contractc. swap
2. futures contractd. option

10.It is a contract traded on an exchange that allows an entity to buy or sell a specified quantity of commodity or a financial security at a specified price on a specified future date.

1. forward contractc. swap
2. futures contractd. option

ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 4)

11.After bifurcation, the embedded derivative is accounted for

a. at costc. lower of a and b

b. at fair value d. either a or b

12.An option to convert a convertible bond into shares of common stock is a(n)

a.embedded derivative.c. hybrid security.

b.host security.d. fair value hedge.

13.Where in its financial statements should a company disclose information about its concentration of credit risks?

a, No disclosure is required.

b. The notes to the financial statements.

c. Supplementary information to the financial statements.

d. Management's report to shareholders.

14.Which of the following risks are 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.

1. I only.c. Both I and II.
2. II only.d. Neither I nor II.

5.Disclosure of information about significant concentrations of credit risk is required for:

a. All financial instruments.

b. Financial instruments with off-balance-sheet credit risk only.

c. Financial instruments with off-balance-sheet market risk only.

d. Financial instruments with off-balance-sheet risk of accounting loss only.

Use the following information for the next five questions:

Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2002. This contract gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on April 30, 2002. WSM shares are trading at $100 per share on January 2, 2002, at which time Hall pays $400 for the call option.

6.Refer to Hall, Inc. The call option would be recorded in the accounts of Hall as

a. an asset.

b. a liability.

c. a gain.

d. would not be recorded in the accounts (memorandum entry only).

7.Refer to Hall, Inc. Assume that the price of the WSM shares has risen to $120 per share on March 31, 2002, and the Hall is preparing financial statements for the quarter ending March 31. As regards this option, Hall, Inc., would report which of the following?

a. A $20,000 realized gain.

b. A $20,000 unrealized gain.

c. a description of the change in price would be disclosed in the notes to the financial statements.

d. Nothing would be reported in the financial statements or the notes thereto.

8.Refer to Hall, Inc. The 1,000 shares of WSM stock in this contract is referred to as

a. the collateral.c. the option premium.

b. the notional amount.d. the derivative.

9.Refer to Hall, Inc. The $400 paid by Hall, Inc., to Baird Investment is referred to as

a. the option premium.c. the strike price.

b. the notional amount.d. the intrinsic value.

10.Refer to Hall, Inc. Assume that the price per share of WSM stock is $120 on April 30, 2002, and that the time value of the option has not changed. In order to settle the option contract, Hall, Inc., would most likely

a. pay Baird Investment $20,000.

b. purchase the shares of WSM at $100 per share and sell the shares at $120 per share to Baird.

c. receive $20,000 from Baird Investment.

d. receive $400 from Baird Investment.