1. What contract below is not eligible for hedge accounting under SFAS 133?
a. Embedded call option
b. Forward rate agreement
c. Covered call
d. Interest rate futures
2. The price of a block of 10,000 options may be different than the price of a single option if all 10,000 are sold in a block. SFAS 133 requires a fair market value blockage adjustment as follows:
a. Upward
b. Downward
c. Both answers a and b above
d. Neither answers a or b above
3. Suppose that a change in the price of a lumber inventory forecasted purchase (as opposed to a firm commitment) is hedged by a forward contract designated in advance as a cash flow hedge. The hedge may result in which of the following outcomes, relative to having no hedge, in periods prior to the purchase of the inventory?
a. The hedge may reduce reported earnings prior to the transaction
b. The hedge may increase reported earnings prior to the transaction
c. Both answers a and b are possible depending upon the direction of the price movements
d. None of the above since this hedge does not affect reported earnings prior to the purchase transaction or dedesignation.
4. Suppose that a change in the price of a lumber inventory forecasted purchase (as opposed to a firm commitment) is hedged by a forward contract designated in advance as a cash flow hedge. An ineffective hedge may result in which of the following outcomes relative to an effective hedge in periods prior to the purchase of the inventory?
a. Ineffectiveness may reduce reported earnings prior to the transaction
b. Ineffectiveness may increase reported earnings prior to the transaction
c. Both answers a and b are possible depending upon the direction of the hedge’s ineffectiveness
d. None of the above since ineffectiveness does not affect reported earnings prior to the purchase
5. Suppose that a change in the price of a lumber inventory forecasted sale is hedged by a forward contract designated in advance as a cash flow hedge. The hedge may result in which of the following outcomes relative to having no hedge in periods prior to the sale of the inventory?
(Assume the inventory is on hand and that the sales price of the inventory always exceeds the original purchase price.)
a. The hedge may reduce reported earnings prior to the transaction
b. The hedge may increase reported earnings prior to the transaction
c. Both answers a and b are possible depending upon the direction of the price movements
d. None of the above since this hedge does not affect reported earnings prior to the sale transaction
6. Suppose that a change in the price of a lumber inventory forecasted sale is hedged by a forward contract designated in advance as a cash flow hedge. An ineffective hedge will result in which of the following outcomes relative to an effective hedge in periods prior to the sale of the inventory?
(Assume the inventory is on hand and that the sales price of the inventory always exceeds the original purchase price.)
a. Ineffectiveness may reduce reported earnings prior to the transaction
b. Ineffectiveness may increase reported earnings prior to the transaction
c. Both answers a and b are possible depending upon the direction of the hedge’s ineffectiveness
d. None of the above since ineffectiveness does not affect reported earnings prior to the sale transaction
7. Suppose that a change in the price of a lumber inventory forecasted sale is hedged by a forward contract designated in advance as a fair value hedge. The hedge may result in which of the following outcomes relative to an effective hedge in periods prior to the sale of the inventory?
(Assume the inventory is on hand and that the sales price of the inventory always exceeds the original purchase price.)
a. The hedge may reduce reported earnings prior to the transaction
b. The hedge may increase reported earnings prior to the transaction
c. Both answers a and b are possible depending upon the direction of the price movements
d. None of the above since this hedge does not affect reported earnings prior to the sale transaction
8. Suppose that a change in the price of a lumber inventory forecasted sale is hedged by a forward contract designated in advance as a fair value hedge. An ineffective hedge will result in which of the following outcomes relative to an effective hedge in periods prior to the sale of the inventory?
(Assume the inventory is on hand and that the sales price of the inventory always exceeds the original purchase price.)
a. Ineffectiveness may reduce reported earnings prior to the transaction
b. Ineffectiveness may increase reported earnings prior to the transaction
c. Both answers a and b are possible depending upon the direction of the hedge’s ineffectiveness movements.
d. None of the above since ineffectiveness does not affect reported earnings prior to the sale transaction
9.Suppose a forward contract is used as a fair value foreign currency hedge of an asset denominated in Mexican pesos. Hedge effectiveness is judged by comparing changes in the fair value of the forward contract with changes in the fair value of the U.S. dollar vis-à-vis the peso. What will be the impact of hedge ineffectiveness?
a. No impact since only cash flow hedges are subject to hedge accounting that may be judged ineffective.
b. No impact if the asset is an available-for-sale security denominated in pesos.
c. No impact if the asset is a firm commitment at a future date rather than an available-for–sale asset.
d. None of the above answers are correct.
10. Suppose a company enters into an interest rate swap as a cash flow hedge of variable interest rate debt. Present value of each swap settlement is computed according to which of the following answers assuming an upward sloping yield curve?
a. Use a constant discount rate computed as a weighted average of the yield rates.
b. Use a constant discount rate equal to the simple average of the yield rates.
c. Use a constant discount rate equal to the final period’s yield rate.
d. None of the above answers are correct.
11.SFAS 133 limits hedge accounting to which of the following relationships?
a. Only cash flow hedges of derivative financial instruments.
b. Cash flow hedges of derivative financial instruments and certain fair value foreign-currency-denominated nonderivative instruments.
c. Cash flow hedges and fair value hedges that reduce market risk exposures.
d. Any derivative or nonderivative financial instrument for which there is no credit risk.
12. The FASB’s stated long-term objective of having all derivative and nonderivative financial instruments booked at fair value on any reporting date would have what impact on hedge accounting?
a. This would eliminate all hedge accounting treatments for financial instruments.
b. This would have no impact on SFAS 133 hedge accounting rules unless the FASB changed SFAS 133.
c. This would eliminate cash flow hedges but not foreign currency hedge accounting.
d. Irrespective of possible answers above, the FASB has never declared that its long-term objective is to require fair value reporting of all financial instruments.
13. Which of the following restrictions apply to an underlying of a derivative financial instrument?
a. The underlying must always be a market price or an interest rate derived from financial markets.
b. The underlying may be most any external index including official rainfall on a given day or the outcome of a NFL game between the Green Bay Packers versus the Minnesota Vikings.
c. The underlying may be most any index that is stated in monetary terms (thereby excluding rainfall amounts or sports scores).
d. None of the above answers are correct.
14.Which of the following cannot be an underlying according to SFAS 133?
a. Sales revenue attained by one of the contracting parties.
b. Independent appraisal of a building owned by one of the contracting parties.
c. Both of the above answers are correct.
d. None of the above answers are correct.
15.SFAS 133 net settlement provisions call for settlement to be in cash or in assets easily converted into cash. Which of the following does not meet the net price settlement test to qualify as a derivative financial instrument in contract between Intel Corporation and General Electric?
a. Corn prices on the Chicago Board of Trade exchange.
b. The price of a common stock of Microsoft Corporation.
c. The price of the common stock of Intel Corporation.
d. All of the above prices qualify since they are easily converted into cash in an organized market exchange.
16.Which of the following embedded derivatives serves to disqualify the derivative from SFAS 133 accounting rules?
a. A prepayment option of a mortgage loan.
b. An interest-only strip embedded derivative.
c. A principal-only strip embedded derivative.
d. All of the above answers are correct.
17.Which of the following types of contracts are generally excluded from SFAS 133 accounting rules (including fair market value adjustment rules)?
a. A sales contract by Intel Corporation for microprocessors manufactured by Intel.
b. A purchase contract by Dell Corporation for microprocessors to be used in Dell computers.
c. A “regular-way” securities trade contract.
d. All of the above answers are correct.
18. The FASB’s Exposure Draft 162-B required that both the host contract and its embedded derivatives be accounted for as a derivative contract. What happened to this provision in SFAS 133?
a. The provision remains the same in SFAS 133.
b. The provision is changed in SFAS 133 to allow for separate treatments of derivative versus nonderivative components.
c. Nonderivative components are never allowed to be accounted for as hedges under SFAS 133.
d. Both Answers c and d above are correct.
19. The “clearly-and-closely related” provisions of SFAS 133 apply mainly to which of the following?
a. A decision as to whether an embedded derivative is subject to SFAS 133 accounting rules.
b. A decision as to whether an embedded derivative will be accounted for separately from its host contract.
c. The degree of ineffectiveness of an interest rate swap contract.
d. The degree of ineffectiveness of a foreign currency hedging contract.
20. For purposes of fair value measurement, SFAS 133 relies most heavily upon which prior standard?
a. SFAS 105
b. SFAS 107
c. SFAS 115
d. SFAS 131