Chapter 07

Multiple Choice Questions

1.
According to the World Trade Organization, what was the size of
international trade in 2008?
a. $7,000,000,000 (7 billion dollars)
b. $70,000,000,000 (70 billion dollars)
c. $37,000,000,000 (37 billion dollars)
d. $16,000,000,000,000 (16 trillion dollars)
2.
The central bank of Country X buys and sells its own currency to ensure
that the currency is always exchanged in a ratio of 2:1 with the
currency of Country Y. What can we conclude about these two
currencies?
a. Country X is using the Euro.
b. Country X has pegged its currency to the currency of Country Y.
c. Country X has an undesirable currency.
d. Country X allows its currency to float relative to the currency of
Country Y.
3.
The number of U.S. dollars ($) today to buy one U.K. pound (£) six
months from now is called:
a. the spot rate
b. the exact rate
c. the forward rate
d. the prime rate
4.
What is the intrinsic value of a foreign currency option?
a. the difference between the spot rate and the strike price
b. the gain on the option if it was exercised immediately
c. the chance that a currency will rise over time to make the option in
the money
d. the difference between a call option and a put option
5.
Why must the two-transaction approach be used for recording foreign
currency transactions under U.S. GAAP?
a. The two-transaction approach is required under IFRS.
b. U.S. GAAP requires conservatism in financial reporting.
c. All other methods are excessively complicated to use and therefore
obscure the essence of the transaction.
d. Management made two decisions: one to sell and another to
extend credit in a foreign currency.
6.
Why is the accrual method of accounting for unrealized foreign
exchange gains sometimes criticized?
a. Foreign exchange gains almost never occur, so there is no reason to
have an accounting standard for it.
b. It violates the principle of conservatism.
c. It is not objective.
d. There is no reliable method for measuring unrealized foreign
exchange gains.
7.
Under U.S. GAAP, where are changes in the fair value of derivatives
reported?
a. as part of “Accumulated Other Comprehensive Income” on the
Balance Sheet
b. They are not recognized until the options are exercised.
c. Retained Earnings
d. None of the above
8.
Which of the following is done when accounting for a cash flow hedge,
but is not done when accounting for a fair value hedge?
a. The hedged asset or liability is adjusted to fair value.
b. Foreign exchange gains or losses on the hedged asset or liability are
recorded in net income.
c. Increases or decreases in a derivative's fair value are recorded in
accumulated other comprehensive income.
d. Gains or losses resulting from adjusting the fair value of a derivative
are recorded in net income.
9.
On May 1, 20x1, Usstar purchased a put option to sell £50,000 on April
30, 20x2 at a strike price equal to $2, which was the spot rate on May
1, 20x1. Usstar paid a premium of $0.01 per pound. How should the
option be recorded on May 1, 20x1?
a. Debit FOREIGN CURRENCY OPTION for $100,500.
b. Credit FOREIGN CURRENCY OPTION for $100,500.
c. Debit FOREIGN CURRENCY OPTION for $500.
d. Debit HEDGE EXPENSE for $500.
10.
What term is used to describe the circumstances under which Amazing
Corporation is entering the forward contract?
a. hedge of an unrecognized foreign currency firm commitment
b. hedge of a recognized foreign-currency-denominated asset
c. hedge of a forecast foreign-currency-denominated transaction
d. hedge of net investment in foreign operations