1. Ain’t My Company acquired a pur option for a commodity. The strike price in the option is P10.

If the current
price is P12 the option is said to be
a. At the money
b. In the money
c. Out of the money
d. No money, no honey

2. Which of the following statements is correct regarding the accounting for derivatives?
a. Only derivatives which are designated as hedging instruments are accounted for
b. Subsequent changes in the fair value of a derivative are always recognized in profit or loss
c. All derivatives are measured at fair value
d. In rare cases, a derivative must measured at cost.

3. A derivative designated as a hedge of a firm commitment (such as a documented forthcoming sale or

purchase)
a. Is marked to market each period along with the hedged purchase or sale commitment, even though the
sale or purchase has not occurred
b. Remains off-balance-sheet until the sale or purchase takes place
c. Offsets the hedged item that is marked to market each period, with the resulting gain or loss deferred
until the derivative is closed out
d. Is marked to market each period, with the resulting gain or loss deferred until the sale or purchase takes
place

4. Future contracts trade with every month as a delivery month. A company is hedging the purchase of the
underlying asset on June 15. Which future contracts should it use?
a. The May contract
b. The June contract
c. The July contract
d. The August contract

(as a general rule the future maturity month should be close as possible to but after the month when the asset
will be purchased. In this case the asset will be purchased in June and so the best contract is the July contract)

5. A company due to pay a certain amount of a foreign currency in the future decides to hedge with future
contracts. Which of the following best describes the advantage of hedging?
a. It leads to a better exchange rate being paid
b. It leads to a more predictable exchange rate being paid
c. It caps the exchange rate that will be paid
d. It provides a floor for the exchange rate that will be paid

(Hedging is designated to reduce risk not increase expected profit. Options can be used to create a cap or floor
on the price. Future attempt to lock in the price)

6. Which of the following is true?

a. Hedging can always be done more easily by a company’s shareholders than by the company itself
b. If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by
choosing not to hedge
c. If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging
d. If all companies in an industry do not hedge, a company is liable increase its risk by hedging

(If all companies in a industry hedge, the prices of the end product tends to reflect movements in relevant
market variables. Attempting to hedge those movements can therefore increase risk)

7. 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.
a. I only
b. II only
c. Both I and II
d. Neither I and II

8. Which of the following is the characteristic of a perfect hedge?

a. No possibility of future gain or loss
b. No possibility of future gain only
c. No possibility of future loss only
d. The possibility of future gain and no future loss
9. On January 1, 2023, Len Co. enters into a forward contract to purchase 10,000 shares of stock from Medie
Co. on December 31, 2022 at a forward price of P100 per share. Len Co. prepays the shares at P100 per share
which is the current price of the shares on January 1, 2023. Which of the following is correct?
a. The forward contract meets the definition of a derivative.
b. The forward contract fails the underlying test for a derivative since the current price and forward price
are equal on inception.
c. The forward contract fails the future settlement test for a derivative since Len Co. prepaid shares at
inception at an amount equal to settlement price. Prepayment at an amount equal to settlement price is
tantamount to settlement.
d. The forward contract fails the no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have a similar response to
changes in market factors test for a derivative.

10. On February 1, Jayson Corporation entered into a firm commitment to purchase specialized equipment
from the Vilela Trading Company for ¥80,000,000 on April 1. Jayson would like to reduce the exchange rate
risk that could increase the cost of the equipment in U.S dollars by April 1, but Jayson is not sure which the
direction the exchange rate may move. What type of contract would protect Jayson from an unfavorable
movement in the exchange rate while allowing them to benefit from a favorable movement in the exchange
rate?
a. Interest rate swap
b. Forward Contract
c. Call option
d. Put option

11. Lolit Company purchases a call option to hedge an investment in 20,000 shares of Anis Company stock.
The option agreement provides that if the prices of a share of Anis Company stock is greater than $30 on
October 25, Lolit receives the difference (multiplied by 20,000 shares). Alternatively, if the price of the stock is
less than $30, the option is worthless and will be allowed to expire. Which of the following statements regarding
this call option is correct?
a. The call option effectively hedges the investment in the shares of Anis stock
b. The call option is an option to sell Anis Company stock at a fixed price
c. The call option represents a speculative option rather than a hedge
d. Alpha could have purchased a put option or a call option to effectively hedge the investment in the
shares of Anis stock

On December 1, 20x1, ABC Co. purchased goods from Korean firm for 400,000 wons. ABC Co. was concerned
about the fluctuation in the Korean won, so on this date, ABC Co. entered into a 2-month forward contract to
buy 400,000 wons for P496,000 from a bank at the forward rate of P1.24.

Relevant Rates are show below:

Dec 1, 20x1 Dec 31, 20x1 Jan 31, 20x2

Spot rate 1.20 1.23 1.30
Forward rate 1.24 1.27 1.30

Additional Information:
 ABC Co. chooses to account for the hedging instrument as cash flow hedge.
 The initial spot/forward difference (or forward points) amounts to P16,000 over the 2-month term of the
forward contract [ 400,000 x (1.24 forward rate – 1.20 spot rate)]. This difference will be amortized as
interest expense using the effective interest method.
 Given the spot/forward relationship above, the implicit interest rate is 19.84% per annum or 1.6530% per
month.
 The following are the relevant present value factors:
o Dec 31, 20x1: PV of P1 @ 0.5%, n=1 (1month) ------- 0.99502
o Jan 31, 20x2: PV of P1 @ 0.5%, n=0 (maturity date ) ---------- 1

12. The inventory account is debited on December 1, 20x1 for

a. 400,000 b. 480,000 c. 496,000 d. 0

13. The FOREX gain (loss) on the hedged item on December 31, 20x1 is
a. (12,000) b. 12,000 c. 9,886.00 d. (9,886.00)

14. How much is recognized in other comprehensive income on December 31, 20x1? Debit (Credit)
a. 19,876 b. (19,838) c. 16,312 d. 0
15. The derivate asset (liability) recognized on December 31, 20x1 is
a. 19,876 b. (19,874) c. 11,940 d. 11,904
16. A U.S company invests in a forward purchase contract for 100,000,000 yen with a purchase price of
$0.009/yen, for delivery in 45 days. The spot rate at the time the contract is initiated is $0.0085/yen. At the end
of the accounting year, the forward contract is still outstanding. The year-end spot rate is $0.0088/yen. The
year-end forward rate for delivery at the contract date is $0.0092/yen. How is the forward contract reported on
the U.S company’s balance sheet?
$20,000 asset ($0.0092-$0.009) x 100,000,000 = $20,000

17. Mara Corporation issues a purchase order for 1,000,000 semiconductors to a foreign supplier. The agreed
upon total price is FC 1,200,000 and the current spot rate is $1/FC. Suppose a forward contract is taken out
when the purchase order is issued, at a rate of $.95/FC, for delivery when the semiconductors are received. If
the spot rate rises to $1.05 when the semiconductors are received and paid for by Mara, at what value will the
semiconductors be reported on Mara’s books?
$1,140,000 $1.05 x FC 1,200,000 = $1,260,000
($1.05-$.95) x FC 1,200,000 (120,000)

Angie company anticipates that it will purchase merchandise for €10,000,000 at the end of July, and pay for it at
the end of September. On March 1, it enters a forward contract to buy €10,000,000 on September 30. The
forward contract qualifies as a cash flow hedge. The company’s accounting year ends December 31. The
company purchases the merchandise on July 30 and closes the forward contract and pays for the merchandise
on September 30. It still holds the merchandise at the end of the year. Exchange rates are as follows:

Spot rate Forward rate for

9/30 delivery
March 1 $1.40 $1.41
July 30 1.42 1.415
September 30 1.43 1.43

18. The merchandise is reported on the year-end balance sheet at:

$14,200,000 Changes in the fair value of the forward contract remain in other comprehensive income until
the merchandise is sold. The merchandise is reported at the spot rate at the date of purchase, $1.42.

19. What is the net effect on income for the year?

No effect Changes in the value of the forward are reported in other comprehensive income. The $100 loss
on the payable is exactly offset by a reclassification of $100 out of other comprehensive income, so there is no
net effect on income.
20. When the merchandise is sold, what amount is reported for cost of goods sold?
$14,100,000 At the end of the year, other comprehensive income has a credit balance of $100. When the
merchandise is sold, it is reclassified as a reduction in cost of goods sold; $14,100,000 = $14,200,000 -
$100,000
21. On June 1, 2023 Rolz Corporation (a Filipino company) sold pool cues to a customer in Thailand for
100,000 Baht when the spot rate is P1.50 per Baht. The pool cues are to be paid on September 1, 2023. On
June 1. Rolz Corporation acquires a three-month option to sell 100,000 Baht. The strike price is P1.50 and the
premium is P.05 per unit. On September 1, 2023 Rolz receives 100,000 Baht in settlement of the pool cues. The
spot rate at the date is P1.43 per Baht.
What is the amount that Rolz would report in income as a result of this transaction?
P 145,000 Strike price of P150,000 (100,000 baht x P1.50) less the premium of P5000 (100,000 Baht x
P.05)
22. On January 2, 2023, Lolit Co. a manufacturing company in Manila, sold goods to an American company in
California, USA for $10,000 when the foreign currency exchange rate is P50.00 for a dollar. The goods are to be
paid on March 31, 2023. On January 2, 2023, Lolit Co. acquires a three-month put option to sell $10,000. The
strike price is P50.00. On March 31, 2023, Lolit receives $10,000 from American company in settlement of the
goods sold, when the foreign exchange rate is P48.00 per US dollar. What is the amount that Lolit would report
in the statement of comprehensive income as a result of this transaction?
Zero
On July 1, 2022, the Giggle Corporation issued a 2-year note with a face value of P4,000,000 and a fixed
interest rate of 9%, payable on a semiannual basis. On January 15, 2023, the company entered into an interest
rate swap with a financial institution in anticipated of lower variable rates. At the initial date of the swap, the
company paid a premium of P9,200. The swap had a notional amount of P4,000,000 and called for the payment
of a variable rate of interest in exchange for a 9% fixed rate. The variable rates are set semiannually beginning
January 1, 2023, I order to determine the next interest payment. Differences between rates on the swap will be
settled on a semiannual basis. Variable interest rates and the value of the swap on selected dates are as
follows:

Reset Date Variable Interest Rate Value of Swap

January 1, 2023 8.75% P14,000
June 30, 2023 8.50% 3,500
December 31, 2023 8.85% 3,500

23. Compute the net interest expense on June 30, 2023:

24. Compute the net interest expense on December 31, 2023:

June 30 December 31
Net Interest Expense
Fixed interest (9% x P4,000,000 x ½ year) P180,000 P180,000
Settlement of rate difference:
(8.75% vs 9% on P4,000,000 x ½ year) (5,000)
(8.5% vs 9% on P4,000,000 x ½ year) (10,000)
P175,000 P170,000

On December 1, 2023, Alondra Company made a credit sale to a Korean Company. The amount of sale was
100,000 Korean won. Alondra will collect the account on January 1, 2024. On December 1, the exchange rate
of 40 Korea won for 1 Philippine peso. On December 1, Alondra entered into a future contract to sell 100,000
Korean won on January 1, 2024 at an exchange rate of 40 Korean won for 1 Philippine peso.
25. If the exchange rate for 1 Philippine peso on December 31, 2023 is 50 Korean won, compute the foreign
exchange gain or loss on hedge item:
(P0.025-0.020) x 100,000 = 500 loss
26. Compute the gain or loss on hedging instrument –future contract
(P0.025-0.020) x 100,000 = 500 gain
27. Compute the net (total) foreign exchange gain or loss/ the effect on net income would be
(P0.025-0.020) x 100,000 = 500 loss
(P0.025-0.020) x 100,000 = 500 gain
= ZERO
28. On March 1, Aundrea Corporation entered into a firm commitment to purchase specialized equipment from
the Gufi Trading company for ¥80,000,000 on June 1. The exchange rate on March 1 is ¥100 =P1. To reduce
the exchange rate risk that could increase the cost of the equipment in pesos. Aundrea pays P20,000 for a call
option contract. This contract gives Aundrea the option to purchase ¥80,000,000 at an exchange rate of
¥100=P1 on June 1. On June 1, the exchange rate is ¥105=P1. How much did Aundrea save by purchasing the
call option? (round to nearest peso)

Inception date (March 1): FV of call option 20,000

Expiration date (June 1): FV of call option
Value of Call option: “out of the money:
Spot rate : ¥80,000,000/¥105 761,905
Strike price : ¥80,000,000/¥100 800,000 0
Foreign exchange loss – current earnings 20,000
Aundrea would have been better off not to have purchased the call option. It should be noted that the strike
price is higher than the market rate price, in which case, there is no value for the option. Therefore, option will
not be exercise which lead to a loss of P20,000 in exercising the option.
Laurel Inc, and its subsidiary Centro Company both uses the peso as their functional currency. Laurel wants to
limit the effect of currency fluctuations in its group accounts in the next quarter, by hedging forecasted foreign
currency (FC) denominated sales by Centro Company. Laurel expects Centro Company to sell PC 35,000,000
of goods on June 20, 2023 (fiscal year ends March 31). Therefore n January 1, 2023, it enters into a six-month
forward contract sell FC 13,500,000 and receive P96,429 on June 30, 2023 (at a forward rate of 1 FC: P140).
Since Laurel and Centro company both have the same functional currency, Laurel is permitted to hedge the
subsidiary’s exposure. The relevant discount rate is 6%.
The following table summarize the key data:

Date Spot rate Forward rate

1/1/2023 P1 : FC 135 P1 : FC 140
3/31/2023 P1 : FC 140 P1 : FC 142
6/30/2023 P1 : FC 144 P1 : FC 144

29. What is the foreign exchange gain or loss due to hedging instrument on March 31, 2023?
1/1/2023 Original Forward rate : FC 13,500,000/140 P96,429
3/31/2023 Current (remaining) forward rate: FC 13,500,000/142 95,070
Forex gain on hedging instrument – equity P 1,359
Less: Discount P 1359 x 6% x3/12 (April to June) 20
PV of Foreign exchange gain due to hedging instrument-OCI P1,339
30. What is the fair value of the forward contract on March 31, 2023?
Fair Value of Forward Contract
January 1, 2023 P0
March 31, 2023 1,339
PV of Forward contract, 03/31/2023 P1,339
31. What is the foreign gain or loss due to hedging instrument on June 30, 2023?
01/01/2023 Original forward rate : FC 13,500,000/140 P96,429
06/30/2023 Spot rate FC 13,500,000/144 93,750
Total foreign exchange gain due to hedging instrument P2,679
Less: PV of Foreign exchange gain due to hedging instrument 1,339
Foreign exchange gain due to hedging instrument P1,340
32. What is the fair value of the forward contract on June 30, 2023?
P2,679 see above computation
33. What is the reportable sales amount on June 30, 2023?
Sales valued at spot rate on June 30, 2023: 13,500,000/144 P93,750
 Add: Closing foreign exchange gain due to hedging instrument 2,679
Reportable sales amount on June 30, 2023 P96,429

On October 1, 2023, ADM Company ordered some equipment from a supplier for 200,000 baht. Delivery and
payment is to occur in November 30, 2023. The spot rates in October 1 and November 30 are P1.50 and P1.30.
34. If the company does not hedge the commitment, at what amount is the equipment recorded on the books on
November 30, 2023? (1.30 x 200,000 = P260,000)
35. If the company acquires on October 1, 2023 a forward contract to hedge any unfavorable changes in fair
value of the equipment, at what amount is the equipment recorded on the books on November 30, 2023? The
October 1, 2023 forward rate for November 30 settlement is P1.35. (1.35 x200,000 = P270,000)