Question 1

The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item,describes:
A)transaction exposure.
B)hedge ineffectiveness.
C)hedge effectiveness.
D)transaction variability.

Accepted Answer

The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item is referred to as hedge effectiveness. If the hedge is effective, the changes in fair value of the forward contract will offset changes in the fair value or cash flows of the hedged item, resulting in a reduction of risk.

Question 2

Hedge effectiveness is ascertained from:
A)the hedge ratio of the hedging relationship reflects actual quantities and is consistent with the purpose of hedge accounting.
B)there is an economic relationship between the hedging instrument and the hedged item.
C)the effect of credit risk does not dominate the economic relationship hedging instrument and the hedged item.
D)all of the above.

Accepted Answer

Hedge effectiveness is ascertained from all three criteria listed in the answer choices:

A) The hedge ratio of the hedging relationship reflects actual quantities and is consistent with the purpose of hedge accounting. This criterion ensures that the hedge ratio used for accounting purposes is appropriate and reflects the actual relationship between the hedging instrument and the hedged item.

B) There is an economic relationship between the hedging instrument and the hedged item. This criterion ensures that the hedge is effective in offsetting the changes in value of the hedged item and the hedging instrument.

C) The effect of credit risk does not dominate the economic relationship between the hedging instrument and the hedged item. This criterion ensures that the hedge is not affected significantly by credit risk, as this can impact the effectiveness of the hedge in mitigating risk.

Thus, all three criteria must be met for hedge effectiveness to be ascertained.

Question 3

All of the following are examples of a fair value hedge,except:
A)a forward contract to sell US$ hedging a recognised trade receivable in US$.
B)a forward contract to buy US$ hedging a highly probable purchase of inventory in US$.
C)a forward contract to buy US$ hedging a recognised trade payable in US$.
D)a forward contract to sell US$ hedging a recognised loan receivable in US$.

Accepted Answer

A fair value hedge is used to hedge against changes in the fair value of an asset, liability, or an unrecognized firm commitment, not against forecasted or highly probable future transactions. Choice B, which involves hedging a highly probable purchase of inventory, is an example of a cash flow hedge, not a fair value hedge.

Question 4

The __________ is a hedge of the exposure to the variability in cash flows that is attributable to a particular risk that is associated with all,or some component of,a recognised asset or liability.
A)fair value hedge
B)hedge of a net investment in a foreign operation
C)cash flow hedge
D)all of the above

Accepted Answer

The definition provided refers specifically to a cash flow hedge, which hedges cash flow variability associated with a recognized asset or liability. Choice A refers to a hedge of fair value changes in an asset or liability, and choice B refers to a hedge of exposure to foreign currency exchange rate changes in a net investment in a foreign operation. Therefore, the correct answer is C.

Question 5

The Australian Financial News quoted A$1.00 equals US$1.05/1.08.What does this represent?
A)A bid rate of US$1.08.
B)An offer rate of A$1.08.
C)A bid rate of A$1.05.
D)An offer rate of US$1.08.

Accepted Answer

The quote "A$1.00 equals US$1.05/1.08" states that one Australian dollar can be exchanged for either US$1.05 (the bid rate) or US$1.08 (the offer rate). Therefore, D (an offer rate of US$1.08) is the correct choice.

Question 6

Which exchange rate is used at the end of the reporting period?
A)The indirect rate.
B)The spot rate.
C)The closing rate.
D)The ending rate.

Accepted Answer

The closing rate is the exchange rate used at the end of the reporting period to translate the foreign currency financial statements into the reporting currency. It reflects the exchange rate at the end of the period, rather than an average or spot rate.

Question 7

All of the following are foreign currency transactions for a company that has A$ as its functional currency,except:
A)goods sold at prices denominated in Japanese Yen.
B)inventory sold to a customer in Hong Kong who pays in A$.
C)borrowing funds where amounts are payable in NZ$.
D)equipment sold at prices denominated in pounds.

Accepted Answer

Foreign currency transactions involve transactions denominated in a currency other than the entity's functional currency. In choice B, the transaction is denominated in the company's functional currency (A$), not a foreign currency, making it the exception.

Question 8

Foreign exchange risk may relate to:
A)recognised assets and liabilities.
B)planned foreign currency transactions.
C)unrecognised firm commitments.
D)all of the above.

Accepted Answer

Foreign exchange risk can relate to recognised assets and liabilities, planned foreign currency transactions, and unrecognised firm commitments. Therefore, all of the above options are correct.

Question 9

AASB 121 requires that the financial report disclose which of the following?
A)The net exchange differences recognised in OCI and accumulated in a separate component of equity.
B)The amount of exchange differences recognised in the profit or loss for the period other than those that relate to financial instruments measured at fair value through profit or loss.
C)Any change in functional currency and reason for change.
D)All of the above.

Accepted Answer

AASB 121 requires disclosure of all the options mentioned in the question, including net exchange differences recognised in OCI and accumulated in a separate component of equity, the amount of exchange differences recognised in profit or loss for the period other than those that relate to financial instruments measured at fair value through profit or loss, and any change in functional currency and reason for change.

Question 10

The Australian financial news quoted US$1.00 equals A$0.9399/0.9649.What does this represent?
A)A bid rate of A$0.9649.
B)The direct form of quotation.
C)An offer rate of A$0.9399.
D)A bid-ask spread of A$0.0351.

Accepted Answer

The answer of The Australian financial news quoted US$1.00 equals...

Question 11

The formal documentation of a hedging relationship must include identification of:
I The hedging instrument
II The hedged item
III The nature of the risk being hedged
IV How the entity will assess hedge effectiveness
A)I,II and III only.
B)I,II and IV only.
C)II,III and IV only.
D)I,II,III and IV.

Accepted Answer

The formal documentation of a hedging relationship must include identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the entity will assess hedge effectiveness. Therefore, all four choices are required for proper documentation.

Question 12

A decrease in the direct rate of US$1 to A$# results in:
A)an increase in US$ amount for a payable in A$.
B)a decrease in A$ amount for a payable in US$.
C)an exchange loss.
D)an increase in A$ amount for receivable in US$.

Accepted Answer

A decrease in the direct rate of US$1 to A$# means that the US dollar has become weaker and the Australian dollar has become stronger. Therefore, if a payable is in US dollars, one would need to pay more Australian dollars to cover the same amount, resulting in a decrease in the A$ amount for a payable in US$.

Question 13

If an Australian company enters a forward exchange contract to buy US$15 000,then which of the following applies?
A)The company's contractual obligation (at the forward rate)and contractual right (at the spot rate)are settled on a net basis.
B)The company has a contractual obligation to deliver foreign currency at the settlement date and that obligation is realised at the spot rate.
C)The company has a contractual right to receive US$15 000 at the settlement date and that right is an asset fixed in A$ at the forward rate.
D)The company's forward contract will act as a hedge against a recognised asset.

Accepted Answer

The answer of If an Australian company enters a forward...

Question 14

At the end of the reporting period,a foreign currency monetary item is remeasured using:
A)the foreign currency monetary value.
B)spot exchange rate.
C)US dollars.
D)the closing rate.

Accepted Answer

The remeasurement of a foreign currency monetary item at the end of the reporting period should be done using the closing rate, which is the exchange rate at the end of the reporting period. This is in accordance with the International Accounting Standards (IAS) and Generally Accepted Accounting Principles (GAAP). Therefore, the best choice is option D.

Question 15

All of the following are examples of a cash flow hedge,except:
A)a forward contract to buy US$ hedging recognised borrowings in US$.
B)a forward contract to buy US$ hedging future interest payments on variable rate debt in US$.
C)a forward contract to sell US$ hedging a highly probable sale of inventory in US$.
D)a forward contract to buy US$ hedging an unrecognised firm commitment to purchase goods in US$.

Accepted Answer

A forward contract to buy US$ hedging recognised borrowings in US$ is an example of a fair value hedge, not a cash flow hedge, because it hedges against the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment, not the variability in cash flows.

Question 16

A forward contact to buy US$40 000 for a planned purchase transaction of US$50 000 has a hedge ratio of:
A)40%.
B)125%.
C)80%.
D)20%.

Accepted Answer

The hedge ratio is calculated by dividing the amount to be hedged (US$40,000) by the total exposure (US$50,000), which results in 0.8 or 80%. Therefore, option C is the correct answer.

Question 17

At the date of the transaction,a foreign currency monetary item is initially recognised and measured using:
A)the closing rate.
B)the foreign currency monetary value.
C)spot exchange rate.
D)US dollars.

Accepted Answer

At the date of the transaction, a foreign currency monetary item is initially recognised and measured using the spot exchange rate. This is the rate at which the currency can be exchanged at that specific point in time. The closing rate and foreign currency monetary value may be used for subsequent remeasurements, but the initial recognition and measurement should be based on the spot exchange rate. USD is not a relevant option as it is not a foreign currency in this context.

Question 18

A realised exchange difference arises:
A)when the exchange rate changes between initial recognition and cash settlement.
B)when the exchange rate changes between initial recognition and end of reporting period.
C)on remeasurement of a monetary liability at the end of the reporting period.
D)on initial recognition of a monetary asset.

Accepted Answer

A realised exchange difference arises when the exchange rate changes between initial recognition and cash settlement. This means the difference in value is only realised when the transaction is settled in cash.

Question 19

All the following items are 'monetary items' according to AASB 121 except:
A)trade payable of ₤50 000.
B)borrowings €30 000.
C)shares held in BHP Ltd listed on the ASX.
D)trade receivable of US$12 000.

Accepted Answer

Shares held in BHP Ltd listed on the ASX are not considered monetary items as their value is subject to market fluctuations and not a fixed amount of currency. All other options are monetary items as their values are fixed in a specific currency.

Question 20

All of the following assets can be defined as 'qualifying assets' except:
A)manufacturing plants.
B)inventories purchased ready for sale.
C)power generation facilities.
D)investment properties.

Accepted Answer

Qualifying assets are those that necessarily take a substantial period of time to get ready for their intended use or sale. Inventories that are purchased ready for sale do not fit this definition as they are already in a condition to be sold without further processing.

Quiz 8: Foreign Currency Transactions and Forward Exchange Contracts

The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item,describes:

Hedge effectiveness is ascertained from:

All of the following are examples of a fair value hedge,except:

The __________ is a hedge of the exposure to the variability in cash flows that is attributable to a particular risk that is associated with all,or some component of,a recognised asset or liability.

The Australian Financial News quoted A$1.00 equals US$1.05/1.08.What does this represent?

Which exchange rate is used at the end of the reporting period?

All of the following are foreign currency transactions for a company that has A$ as its functional currency,except:

Foreign exchange risk may relate to:

AASB 121 requires that the financial report disclose which of the following?

The Australian financial news quoted US$1.00 equals A$0.9399/0.9649.What does this represent?

The formal documentation of a hedging relationship must include identification of: I The hedging instrument II The hedged item III The nature of the risk being hedged IV How the entity will assess hedge effectiveness

A decrease in the direct rate of US$1 to A$# results in:

If an Australian company enters a forward exchange contract to buy US$15 000,then which of the following applies?

At the end of the reporting period,a foreign currency monetary item is remeasured using:

All of the following are examples of a cash flow hedge,except:

A forward contact to buy US$40 000 for a planned purchase transaction of US$50 000 has a hedge ratio of:

At the date of the transaction,a foreign currency monetary item is initially recognised and measured using:

A realised exchange difference arises:

All the following items are 'monetary items' according to AASB 121 except:

All of the following assets can be defined as 'qualifying assets' except: