Question 1

A foreign exchange dealer using the direct form of quotation quoted US$1.00 equals A$1.2897/1.4366. What does this represent?
A) A buying rate of A$1.4366 for US$1.00.
B) A buying rate of US$1.2897 for A$1.00.
C) A selling rate of A$0.1.2897 for US$1.00.
D) A bid-ask spread of A$0.1469.

Accepted Answer

The bid-ask spread is the difference between the buying and selling rates. In this case, the buying rate is A$1.2897 and the selling rate is A$1.4366, so the bid-ask spread is A$0.1469.

Question 2

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.

Question 3

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 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 given in the question corresponds to a cash flow hedge. Fair value hedge refers to hedging the exposure to changes in fair value of a recognised asset or liability, while hedge of a net investment in a foreign operation refers specifically to hedging the exposure to foreign currency risk related to a net investment in a foreign operation. Therefore, the correct choice is C, cash flow hedge.

Question 5

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 it will cost less A$ to buy 1 US$. Therefore, for a payable in US$, the amount payable in A$ will decrease.

Question 6

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.

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

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

The initial recognition and measurement of a foreign currency monetary item is done using the spot exchange rate at the date of the transaction. This ensures that the item is recorded at its fair value in the reporting currency.

Question 9

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 known as hedge effectiveness. This refers to how well the hedging strategy is working to mitigate risk. If the offset is not effective, then there is hedge ineffectiveness. Transaction exposure refers to the risk that arises from fluctuating exchange rates in international transactions, and transaction variability is not a relevant term in this context.

Question 10

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

All of the options are correct in determining hedge effectiveness. The hedge ratio should reflect actual quantities and should be consistent with the purpose of hedge accounting. There should be an economic relationship between the hedging instrument and the hedged item. Lastly, credit risk should not dominate the economic relationship between the hedging instrument and the hedged item.

Question 11

All the following items are 'monetary items' according to AASB 121/IAS 21 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 a company are considered as equity instruments and not monetary items according to AASB 121/IAS 21. Trade payable, borrowings and trade receivables are monetary items because their values are fixed in terms of currency and represent amounts of money to be received or paid.

Question 12

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 may relate to all of the above – recognised assets and liabilities, planned foreign currency transactions, and unrecognised firm commitments. Recognised assets and liabilities are subject to changes in exchange rates, which can affect their value in the company's functional currency. Planned foreign currency transactions, such as purchases or sales, may also be affected by changes in exchange rates between the transaction date and settlement date. Unrecognised firm commitments are agreements to buy or sell goods or services at a fixed price in a foreign currency, which may result in losses if exchange rates change before the transaction is completed.

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

According to IAS 21, at the end of the reporting period, a foreign currency monetary item should be remeasured using the closing rate, which is the exchange rate at the end of the reporting period. This ensures that the financial statements reflect the most current exchange rate and accurately reflects the company's financial position.

Question 15

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 value of the planned transaction (US$50,000) by the value of the forward contract (US$40,000). So, the hedge ratio is 125%. However, this is an over-hedge as the contract value is greater than the transaction value. To lessen the over-hedge, the buyer should reduce their forward contract size to US$40,000/1.25 = US$32,000, which will give a hedge ratio of 80%. Thus, the best choice is C, with a hedge ratio of 80%.

Question 16

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 17

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 used at the end of the reporting period to translate foreign currencies into the reporting currency. It is the exchange rate at the date of the balance sheet, which reflects the value of the foreign currency at the end of the period. Therefore, the most appropriate choice is C. Choices A, B, and D are not accurate enough to represent the exchange rate used at the end of the reporting period.

Question 18

AASB 121/IAS 21 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/IAS 21 requires disclosure of all three options, including the net exchange differences recognised in OCI and accumulated in a separate component of equity, 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, and any change in functional currency and reason for change.

Question 19

A foreign exchange dealer using the indirect form of quotation has quoted A$1.00 equals US$0.6961/0.7754. What does this represent?
A) A buying rate of US$0.7754 for A$1.00.
B) A selling rate of A$0.7754 for US$1.00.
C) A buying rate of A$0.6961 for US$1.00.
D) A selling rate of US$0.7754 for A$1.00.

Accepted Answer

The selling rate is the rate at which the dealer will sell the foreign currency. In this case, the dealer will sell US$1.00 for A$0.7754.

Question 20

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 all four elements: the hedging instrument, the hedged item, the nature of the risk being hedged, and how the entity will assess hedge effectiveness. Therefore, Choice D is the correct answer.

Quiz 7: Foreign Currency Transactions and Forward Exchange Contracts

A foreign exchange dealer using the direct form of quotation quoted US$1.00 equals A$1.2897/1.4366. What does this represent?

A realised exchange difference arises:

All of the following are examples of a cash flow 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.

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

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

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

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

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 the following items are 'monetary items' according to AASB 121/IAS 21 except:

Foreign exchange risk may relate to:

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:

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

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

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

AASB 121/IAS 21 requires that the financial report disclose which of the following?

A foreign exchange dealer using the indirect form of quotation has quoted A$1.00 equals US$0.6961/0.7754. 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