Use the following information for the next three questions:

On March 1, 20x1, ABC Co. sold inventory to a foreign company for FC 1,000,000 (FC means foreign currency) when the spot exchange rate is FC 40: 1. The payment is due on April 1, 20x1.

ABC Co. is concerned about the possible fluctuation in exchange rates, so on this date, ABC Co. entered into a forward contract to sell FC 1,000,000 for 25,000 to a broker. According to the terms of the forward contract, if FC 1,000,000 is worth less than 25,000 on April 1, 20x1, ABC Co. shall receive from the broker the difference; if it is worth more than 25,000, ABC Co. shall pay the broker the difference.

1.If the exchange rate on April 1, 20x1 is FC35: 1, how much is the net cash settlement?

a. 3,571 receipt

b. 3,571 payment

c. 4,231 receipt

d. 4,231 payment

2.If the exchange rate on April 1, 20x1 is FC50: 1, how much is the net cash settlement?

a. 5,000 payment

b. 5,000 receipt

c. 6,223 payment

d. 6,223 receipt

3.If the exchange rate on March 31, 20x1 is FC45: 1, how much is the fair value of the interest rate swap?

a. 3,000 asset

b. 3,000 liability

c. 2,778 asset

d. 2,778 liability

ABC Co. does printing jobs for various customers. On January 1, 20x1, ABC Co. forecasted the purchase of 1,000 reams of paper in the next quarter. The expected purchase date is on April 15, 20x1.

ABC Co. expects that the price of paper will fluctuate because of the upcoming elections. Thus, on January 1, 20x1, ABC Co. enters into a forward contract to purchase 1,000 reams of paper at a forward rate of 600 per ream. If the market price on April 15, 20x1 is more than 600, ABC Co. shall receive the difference from the broker. On the other hand, if the market price is less than 600, ABC Co. shall pay the difference to the broker. The forward contract will be settled net on April 15, 20x1. The discount rate is 10%.

4.If the price of paper is 700 per ream on March 31, 20x1, how much is the derivative asset (liability) to be recognized in ABC Co.'s first quarter financial statements?

a. 100,000 asset

b. 100,000 liability

c. 98,772 asset

d. 98,772 liability

5.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 amount Underlying

a. 0.50 1,000,000

b. 1,000,000 currency units Foreign currency

c. 1,000,000 currency units Forward rates

d. 0.50, 0.48 and 0.52 1,000,000

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.

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

a. 0 c. 300 liability

b. 300 asset d. 1,400 asset

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

a. 300 receipt c. 600 receipt

b. 300 payment d. 600 payment