Reference no: EM13518228
1. SFAS 133 hedge accounting rules for fair value hedges arise primarily because of?
a. Lobbying pressure by constituents (e.g., banks) to defer some derivative gains and losses in comprehensive income rather than having to book such fluctuations in earnings over the hedging period.
b. Pressures by the SEC to bring SFAS 133 rules more in line with existing international standards.
c. FASB intentions to incrementally move towards fair value accounting for all financial instruments, but the FASB feels that it is too much of a shock for constituents to abruptly shift to fair value accounting for all such instruments.
d. None of the above.
2.The FASB feels that differences between forecasted transactions and firm commitments are which of the following?
a. inconsequential and have no bearing on differences between accounting for forecasted transactions versus firm commitments since neither appear in traditional financial statements.
b. important only in foreign currency hedge accounting differences arising from firm commitments versus forecasted transactions.
c. important with respect to market price accounting differences arising from firm commitments versus forecasted transactions.
d. None of the above are correct.
3.Under Paragraph 29c of SFAS 133, a forecasted transaction between a parent company and its subsidiary can be accounted for as a cash flow hedge under the conditions that:
a. Less than 100% of the voting shares of the subsidiary are owned by the parent.
b. Both parties can enter into a similar transaction with a non-related entity if it is beneficial to the consolidated entities as a whole.
c. The transaction meets certain tests as a foreign currency hedge.
d. There are no conditions in which transactions between related parties can be accounted for as a hedge under SFAS 133.
4.Suppose General Electric uses the U.S. dollar as its functional currency and has a Mexican peso debt requiring peso interest payments. Which statement below is the most correct?
a. The foreign exchange risk in pesos cannot be designated as a cash flow hedge, because the peso debt obligation should be remeasured at current spot rates on each reporting date with changes in those spot rates being recognized as current earnings.
b. The interest rate risk can be designated as a cash flow hedge, because the interest rate risk is not remeasured each period.
c. Both answers above.
d. None of the answers above.
5.ABC loans $10 million to an oil company under terms where the bonds guarantee a coupon payment of 10% and repayment of all principal. In addition, however, the bonds make a knock-in added payment of 1% for each period’s average daily crude oil price in excess of $15 per barrel. The coupon payments thus have both a 10% bond coupon payment and an embedded derivative for the knock-in payments. Does the embedded derivative meet the clearly-and-closely related tests to be accounted with the bonds or must this derivative be accounted for separately from its host contract?
a. The embedded derivative meets the closely and clearly related tests, but since the amounts are speculative, the derivative cannot be viewed as a hedge.
b. The embedded derivative meets the closely and clearly related tests and can be viewed as a fair value hedge.
c. The embedded derivative meets the closely and clearly related tests and can be viewed as a cash flow hedge.
d. None of the above answers is a correct answer.
6.Creditor C loans Borrower B $10 million with an option to convert each bond into 20 shares of Borrower B’s common stock. Assume that those shares, if acquired, would be available-for-sale and not trading securities. Answer the following according to SFAS 133 revisions of SFAS 115 rules.
a. Creditor C has an embedded derivative that is clearly-and-closely related to the loan and the bonds receivable and the derivative are not accounted for separately.
b. Creditor C has an embedded derivative that is not clearly-and-closely related to the loan and the bonds receivable and the derivative are not accounted for separately.
c. Creditor C has an embedded derivative that is clearly-and-closely related to the loan and the bonds receivable and the derivative are accounted for separately.
d. None of the above.
7. Creditor C loans Borrower B $10 million with an option to convert each bond into 20 shares of Borrower B’s common stock. Assume that those shares, if acquired, would be available-for-sale and not trading securities. Answer the following according to SFAS 133 revisions of SFAS 115 rules..
a. Borrower B has an embedded derivative that is clearly-and-closely related to the loan and the bonds payable and the derivative are not accounted for separately.
b. Borrower B has an embedded derivative that is not clearly-and-closely related to the loan and the bonds payable and the derivative are not accounted for separately.
c. Borrower B has an embedded derivative that is clearly-and-closely related to the loan and the bonds payable and the derivative are accounted for separately.
d. None of the above.
8. Creditor C loans Borrower B $10 million with interest to be paid periodically at a fixed rate in European Euros. The interest may thus vary when converted into U.S. dollars. Answer the following according to SFAS 133 revisions of SFAS 52 rules.
a. Creditor C has an embedded derivative that is subject to SFAS 52 rules and the bonds receivable and the derivative are not accounted for separately.
b. Creditor C has an embedded derivative that is not subject to SFAS 52 rules and the bonds receivable and the derivative are not accounted for separately.
c. Creditor C has an embedded derivative that is subject to SFAS 52 rules and the bonds receivable and the derivative are accounted for separately.
d. Creditor C has an embedded derivative that is not subject to SFAS 52 rules and the bonds receivable and the derivative are accounted for separately.
9.Company S is a securitization trust that receives an unsecured variable rate of interest on a $10 million note. To securitize the note, Company S swaps its LIBOR-based variable rate of interest to its investors in return for a fixed rate of interest. Is this interest rate swap a derivative subject to SFAS 133 rules?
a. Yes. The swap has a notional, an underlying , settles in cash, and requires no premium.
b. No. The swap has a notional, an underlying , settles in cash, and requires no premium. However, SFAS 133 explicitly prohibits securitization hedges.
c. No. The swap has a notional (the loan principal), settles in cash, and requires no premium. However, it does not have a qualified underlying for a SFAS 133 derivative instrument.
d. No. The swap has an underlying (the loan principal), settles in cash, and requires no premium. However, it does not have a qualified notional for a SFAS 133 derivative instrument.
10. Company S is a securitization trust that receives an unsecured variable rate of interest on a $10 million note. The loan is to large California farm, and the amount of variable interest is indexed to commodity spot prices of rice. To securitize the note, Company S swaps its variable rate of interest to its investors in return for a fixed rate of interest. Is this interest rate swap a derivative subject to SFAS 133 rules?
a. Yes. The swap has a qualified notional, a qualified underlying, settles in cash, and requires no premium.
b. No. The swap has a notional, an underlying, settles in cash, and requires no premium. However, SFAS 133 explicitly prohibits securitization hedges.
c. No. The swap has a notional (the loan principal), settles in cash, and requires no premium. However, it does not have a qualified underlying for a SFAS 133 derivative instrument.
d. No. The swap has an underlying (the loan principal), settles in cash, and requires no premium. However, it does not have a qualified notional for a SFAS 133 derivative instrument.
11. Company S is a securitization trust that receives an unsecured variable rate of interest on a $10 million note. The loan is to large Kansas farm, and the amount of variable interest is indexed to average rainfall across June, July, and August. To securitize the note, Company S swaps its variable rate of interest to its investors in return for a fixed rate of interest. Is this interest rate swap a derivative subject to SFAS 133 rules?
a. Yes. The swap has a notional (the loan principal), an underlying (the variable interest rate), settles in cash, and requires no premium.
b. Yes. The swap has a notional (the loan principal), an underlying (the variable interest rate), settles in cash, and requires no premium. However, SFAS 133 explicitly prohibits securitization swaps.
c. No. The swap has a notional (the loan principal), settles in cash, and requires no premium. However, it does not have a qualified underlying for a SFAS 133 derivative instrument.
d. None of the above.
12.The following contract does not have a SFAS 133 Paragraph 6 notional in a clear sense. Company C pays $100,000 for an option to receive $2 million if the average LIBOR for the next 12 months exceeds 8%. Is this option contract subject to SFAS 133 rules?
a. No. Paragraph 6a requires a notional amount.
b. No. Paragraph 6b requires that there be little or no initial investment. The $100,000 option premium is larger than “would be required for other types of contracts that would be expected to have a similar response to changes in market factors.” The reason has nothing to do with the a Paragraph 6a notional criterion. ..
c. No. Gambling derivatives such as this are not allowed under SFAS 133.
d. Yes. Paragraph 6a requires either a notional or other “payment provisions” under the contract.
13.The San Antonio Spurs currently have 11 shareholders who privately held their shares for a number of years. Suppose Texaco purchases six-month call option for $5 million to purchase 1,000,000 Spurs common shares. At the same time, Texaco pays another $5 million for a six-month “put” option to trade the 1,000,000 shares for six long-term oil and gas leases on a private ranch in Alberta, Canada. Do these options fall under accounting rules in SFAS 133 on the Texaco’s general ledger? In other words, given only the above facts, are the options SFAS 133 derivative financial instruments?
a. Both the put and the call options are SFAS 133 derivatives.
b. Only the call option is a SFAS 133 derivative.
c. Only the put option is a SFAS 133 derivative.
d. Neither the put nor the call option is a SFAS 133 derivative.
14.Texaco has a contract to purchase the Brooklyn Bridge anytime within the next year for $50 million. Is this contract a SFAS 133 derivative financial instrument?
a. No because the bridge settlement is associated with the underlying and denominated in an amount equal to the notional amount.
b. No if we assume that Texaco cannot readily convert the Brooklyn bridge cash.
c. Both answers above are correct.
d. None of the above.
15.Assume that the “regular way” of settling a forward contract to sell a mortgage-backed security is to settle in 90 days. Is this forward contract a SFAS 133 derivative instrument?
a. Yes as long as this is the “regular way.”
b. No because “regular way” contracts are not subject to SFAS 133 rules.
c. No because a mortgage-backed security cannot be an underlying.
d. No because a mortgage-backed security cannot be an underlying.
16.Charter Airlines has a contract to purchase 100,000 gallons of fuel per month at $1.10 per gallon for a period of 12 months. However, the contract stipulates that either Charter or its supplier can cancel fuel delivery of any amount provided it pays the difference between the current market price and the contract price. Hence, Charter may either receive cash or pay out cash no matter who cancels the delivery. Identify the underlying and the notional in this contract, and then discuss why SFAS 133 accounting rules must or must not be applied to this contract in the ledgers of Charter Airlines.
a. The notional is 100,000 gallons with an underlying of $1.10. The contract is not subject to SFAS 133 rules because Charter’s supplier can get out of the contract at any time.
b. The notional is $1.10 with an underlying of 100,000 gallons of fuel.. The contract is not subject to SFAS 133 rules because Charter’s supplier can get out of the contract at any time
c. The notional is 100,000 gallons with an underlying of $1.10. The contract is subject to SFAS 133 rules because there is a contractual specification for net settlement at any time.
d. The notional is $1.10 with an underlying of 100,000 gallons of fuel.. The contract is subject to SFAS 133 rules because Charter’s supplier can get out of the contract at any time
17.Bank A has a 18% note with Shaky S Ranch that pays Bank A amortized principal and interest payments each month until the loan is paid off in 12 months. Bank A enters into a credit swap with Surety Bank . Bank A submits all Shaky S Ranch’s payments on the note to Surety and receives a fixed rate of 8% plus a lump-sum payment of the principal at the end of the 12 months. Bank A has thus swapped out its Shaky credit risk in return for losing 10% of the interest on the note. Does this credit swap fall under SFAS 133 accounting rules.
a. Yes since it has an underlying, a notional, a net cash settlement provision, and requires no large premium to enter into the swap.
b. No because financial guarantees are specifically excluded by SFAS 133.
c. No because the net settlements are subject to a Shaky third party rather than an independent market event.
d. No because this would be deemed a sale of the 18% note without recourse and the issuance of an 8% note that is, in effect, independent of the 18% note and thus is subject to SFAS 115 rules that substitute for SFAS 133 rules in this instance.
18.Aggie Land Company purchases spends $50,000 for a six month option to purchase 1,500 acres of the Longhorn Ranch for $500 per acre. Land transactions in this part of Texas are few and far between, and the Aggies want to have more time to sweat out the outcome of efforts to rezone the property for commercial development. Is this option a derivative instrument subject to SFAS 133 rules?
a. Yes since it has an underlying of $500 per acre, a a notional of 1,500 acres, a net cash settlement provision of $750,000 for the land. The $50,000 premium is 6.67% of the settlement price.
b. Yes since it has an underlying of 1,500 acres, a a notional $750 per acre, a net cash settlement provision of $750,000 for the land. The $50,000 premium is 6.67% of the settlement price
c. No since the option is for land that is not readily converted into cash in an active trading market.
d. No since Putter Corporation is the option writer and written options are not accounted for as derivatives under SFAS 133 rules.
19.Putter Corporation receives no premium for a one-year option to sell 100,000 shares of its own common shares to Caller Corporation. Putter’s outstanding shares are currently selling in an active public stock exchange for $2.20 per share. The strike price is $2 per share. Assume that Putter can settle the contract whenever it chooses over the next year by delivering the shares or by paying/receiving a net cash difference between the strike price and the current market price when the option is exercised. Must Putter Corporation follow SFAS 133 rules when accounting for this option?
a. Yes, because there is no premium on a derivative having a notional of 100,000 shares, an underlying of the price of the shares when the option is exercised, and net cash settlement provisions in lieu of delivering actual shares.
b. No, because the option can be settled by issuing previously authorized but unissued shares and, thereby, does not require either cash settlement or the issuance of treasury shares that the Putter Corporation purchased on the open market.
c. No, because SFAS 133 cover derivatives that are indexed to its own stock classified as Stockholders’ Equity.
d. No since Putter Corporation is the option writer and written options are not accounted for as derivatives under SFAS 133 rules.
20.Assume all of the same facts in the above question except now you should assume that the option may be exercised at the discretion of Caller Corporation rather than Putter Corporation. . In other words, Putter Corporation must either deliver shares or the net cash settlement if Caller Corporation exercises the option. Must Putter Corporation follow SFAS 133 rules when accounting for this option?
a. Yes, because there is no premium on a derivative having a notional of 100,000 shares, an underlying of the price of the shares when the option is exercised, and net cash settlement provisions provisions in lieu of delivering actual shares.
b. No, because the option can be settled by issuing previously authorized but unissued shares and, thereby, does not require either cash settlement or the issuance of treasury shares that the Putter Corporation purchased on the open market.
c. No, because SFAS 133 cover derivatives that are indexed to its own stock classified as Stockholders’ Equity.
d. . No since Putter Corporation is the option writer and written options are not accounted for as derivatives under SFAS 133 rules.