1.
|
A derivative must contain which attributes?
|
|
It has an underlying interest rate, security or commodity price, foreign exchange rate, or index with one or more notional amounts
|
|
It has no initial cash outlay
|
|
The terms permit net settlement between counterparties.
|
|
All of the above
|
|
|
|
2.
|
Derivatives can be either on the balance sheet or off the balance sheet. They include
|
|
Futures.
|
|
Bonds.
|
|
Mortgage backed securities.
|
|
All of the above.
|
|
|
|
3.
|
Which of the following is the risk that arises from the possibility that future changes in market prices may make a financial instrument less valuable or more onerous?
|
|
Market risk.
|
|
Correlation risk.
|
|
Systematic risk.
|
|
Valuation risk.
|
|
|
|
4.
|
Which of the following risks is(are) inherent in an interest-rate swap agreement: I) The risk of exchanging a lower interest rate for a higher interest rate; or II) The risk of nonperformance by the counterparty to the Agreement.
|
|
I only.
|
|
II only.
|
|
Both I and II.
|
|
Neither I nor II.
|
|
|
|
5.
|
The FASB's definition of derivatives excludes:
|
|
Forward contracts
|
|
Swaps
|
|
Certain insurance contracts
|
|
All of the above
|
|
|
|
6.
|
A company enters into derivative contracts for ___________ purposes.
|
|
Trading
|
|
Hedging
|
|
Timing
|
|
A and B only
|
|
|
|
7.
|
The accounting for fair value hedges records the derivative at its
|
|
Amortized cost.
|
|
Carrying value.
|
|
Fair value.
|
|
Historical cost.
|
|
|
|
8.
|
All of the following statements regarding accounting for derivatives are correct EXCEPT that
|
|
They should be recognized in the financial statements as assets and liabilities.
|
|
They should be reported at fair value.
|
|
Gains and losses resulting from speculation should be deferred.
|
|
Gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
|
|
|
|
9.
|
An option to convert a convertible bond into shares of common stock is a(n)
|
|
Embedded derivative.
|
|
Host security.
|
|
Hybrid security.
|
|
Fair value hedge.
|
|
|
|
10.
|
Disclosure of information about significant concentrations of credit risk is required for
|
|
Most financial instruments.
|
|
Financial instruments with off-balance-sheet credit risk only.
|
|
Financial instruments with off-balance-sheet market risk only.
|
|
Financial instruments with off-balance-sheet risk of accounting loss only.
|
|
|
|
11.
|
Gains or losses on cash flow hedges are
|
|
Ignored completely.
|
|
Recorded in equity, as part of other comprehensive income.
|
|
Reported directly in net income.
|
|
Reported directly in retained earnings.
|
|
|
|
12.
|
To the extent the hedge is effective, a loss arising from the decrease in fair value of a derivative is included in current earnings if the derivative qualifies and is designated as a
|
|
Fair-Value hedge
|
|
Cash-Flow hedge
|
|
Both a Fair-Value hedge and Cash-Flow hedge
|
|
Neither a Fair-Value hedge nor a Cash-Flow hedge
|
|
|
|
13.
|
Which of the following transactions may NOT be eligible for cash flow hedge treatment?
|
|
A hedge of future cash interest outflows associated with floating rate debt.
|
|
A hedge of a forecasted future purchase of a commodity to protect against rising prices.
|
|
A hedge of an exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment.
|
|
A hedge to lock in the future cost of borrowing for the company.
|
|
|
|
14.
|
Under IFRS, companies record unrealized holding gains or losses on cash flow hedges as:
|
|
Current income or loss.
|
|
Adjustments to the value of the hedged item.
|
|
Other comprehensive income.
|
|
Retained earnings.
|
|
|
|
15.
|
All of the following are requirements for disclosures related to financial instruments EXCEPT
|
|
Disclosing the fair value and related carrying value of the instruments.
|
|
Distinguishing between financial instruments held or issued for purposes other than trading.
|
|
Combining or netting the fair value of separate financial instruments.
|
|
Displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.
|
|
|
|
16.
|
For a hedging relationship to qualify as “highly effective,” the change in fair value or cash flows of the hedge must fall between _________ and ____________ of the opposite change in fair value or cash flows of the exposure that is hedged.
|
|
50%, 100%.
|
|
80%, 125%.
|
|
0%, 100%.
|
|
75%, 100%.
|
|
|
|
17.
|
A highly-effective hedge of an existing asset or liability that is reported on the balance sheet would be recorded using
|
|
Modified Cash Basis Accounting.
|
|
Critical Term Hedge Analysis.
|
|
Fair Value Hedge.
|
|
Hedge of Net Investment in Foreign Subsidiary.
|
|
|
|
18.
|
A fair value hedge differs from a cash flow hedge because a fair value hedge
|
|
Cannot be used for firm purchase or sales commitments.
|
|
Is not recorded unless it is a highly-effective hedge.
|
|
Records gains or losses in the value of the derivative directly to earnings of the company in the period of change.
|
|
Defers the gains or losses in the value of the derivative using Other Comprehensive Income.
|
|
|
|
19.
|
When a cash flow hedge is appropriate, the effective portion of the gain or loss on the derivative is
|
|
Recorded in equity as part of other comprehensive income.
|
|
Recognized immediately at the time the agreement is made.
|
|
Recognized over time, amortized over the period of the agreement.
|
|
Recognized over time, offset by the fluctuation in the value of the hedged asset or liability.
|
|
|
|
20.
|
When preparing their year-end financial statements, the Warner Company includes a footnote regarding their hedging activities during the year. Which of the following is NOT required to be disclosed?
|
|
How hedge effectiveness is determined and assessed
|
|
The specific types of risks being hedged, and how they are being hedged
|
|
Alternative hedging options declined
|
|
The net gain or loss reported for the period for fair value hedges and where in the financial statements it is reported
|
|
|
|