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Flashcards in Financial Instruments Deck (51)
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1

Fair Value is usually the general way in which financial instruments are valued. TF

True

2

Financial instruments impose on one entity a contractual obligation and grant another entity a contractual right. TF

True

3

FI's result in the exchange of cash or ownership interest in equity. TF

True

4

Investment in another entity IS NOT a type of financial instrument. TF

False

5

All contracts are forms of FI's. TF

False

6

IFRS: defines financial assets and liabilities separately, unlike GAAP.

True

7

IFRS Difference: Identifies loans and receivables specifically whereas GAAP doesn't.

True

8

IFRS Difference: Impairment is completed relative to the recoverable about whereas GAAP impairment is tested relative to fair value.

True

9

What information must be disclosed for each financial instrument for which it is practicable to estimate fair value?

Fair Value, Related carrying value, whether it is an asset or a liability

10

If not using fair value, the reason must be disclosed as into why. TF

True

11

Credit Risk and concentration of credit risk are optional disclosures pertaining to FIs. TF

False, mandatory

12

Market Risk disclosures are required for FI's. TF

False, not required but encouraged

13

Fair value disclosures can be made in the body of the FSs as well as the footnotes. TF

True

14

A derivative is a financial instrument that has one or more underlings and one or more notional amounts (or a payment provision), requires not initial investment, and its terms require or permit a net settlement. TF

True, it must possess those three characteristics to meet the definition of a derivative.

15

What is a futures contract?

A price set now for an exchange of goods in the future, coordinated through a clearinghouse (Chicago Board of Trade etc.)

16

What is a forward contract?

Similar to a futures contract but coordinated directly through contracting parties, instead of a clearinghouse

17

What is a swap contract?

To swap fixed rate debt for variable rate debt or vice versa

18

Gains and losses in derivatives are recognized in OCI. TF

False, earnings

19

Futures and forwards are mandatory obligations to buy at a specified future date. TF

True

20

Embedded derivatives that are not closely and clearly related to the host contract need to be bifurcated (seperated) and accounted for independently. TF

True

21

Derivatives held for speculation are designated to hedge risk. TF

False, these derivatives are to obtain a profit only, not to mitigate any other risk through hedges.

22

The underlying of a derivative is a specified price, rate, or other monetary variable.

True (for stock option this would be the strike price)

23

A characteristic of a perfect hedge would be not possibility of future loss only. TF

False, no possibility of future gain or loss

24

The notional amount of a derivative is a specified unit of measure.

True (for stock option would be the total amount of shares)

25

Difference between the strike price and the market price = intrinsic value.

True. Intrinsic value x notional amount = total intrinsic value

26

What is the objective of "hedging"?

To increase certainty, and to decrease volatility.

27

All risk is available for hedge accounting. TF

False, only commodity price risk, foreign exchange risk, interest rate risk, and credit risk.

28

FV Risk in reference to hedging is the risk of loss due to the change in the FV of the hedged item and converts fixed risk into floating risk. TF

True

29

Cash Flow Risk in reference to hedging is the risk of loss due to a change in cash flows of the hedged item and converts fixed risk into floating risk. TF

False, converts floating risk into fixed risk.

30

What are some examples of hedging items?

Recognized assets or liabilities on the B/S, firm commitments (purchase commitments), foreign currency, and forecasted transactions.

31

Gains or losses in FV hedges are included in net income. TF

True

32

Gains or losses in CF hedges are included in net income.

False, ineffective portions are in net income, effective portions are included in OCI

33

What is a hedging instrument?

The hedging instrument is a contract or other arrangement that is entered into to mitigate or eliminate the risk of loss associated with the hedged item.

34

Hedge accounting is all about the delta (change value of contract). TF

True

35

A derivative can be used for an unrecognized firm commitment. TF

False

36

A cash flow hedge converts variable cash flows into fixed cash flows. TF

True

37

To qualify for cash flow hedging formal documentation may or may not be required. TF

True

38

Cash flows related to which types of forecasted transactions CANNOT be hedged?

Business combinations, P's equity in S, entity's own equity instruments

39

Under cash flow hedging, when inventory is sold CGS is adjusted by the balance in OCI. TF

True

40

The effective portion of the change in the fair value of a derivative is recorded in current income. The ineffective portion is recorded in OCI. TF

False, effective OCI, ineffective CI

41

Normal gains from FV hedges are recorded in current income. Normal gains from CF hedges are recorded in OCI. TF

True

42

Change in the value of the hedged item / Change in the value of the derivative = Ineffectiveness. TF

False, Ineffectiveness = Change in the value of the derivative / Change in the value of the hedged item

43

Correlation between the hedging instrument must be between 50% and 150% to qualify for hedge accounting TF.

False, 80% and 125%

44

Deferred gains/losses are required disclosures in regards to hedges. TF

False.

45

A listing of derivatives used for cash flow hedges and the amount of each must be disclosed. TF

False

46

An underlying is the specified price of a commodity trading

True

47

A notional amount is a specified unit of measure regarding the derivative

True

48

Cash flow hedge accounting is allowed for firm commitments? TF

False

49

FV hedge accounting is allowed for forecasted transactions? TF

False

50

Both cash flow hedges and fair value hedges can be used to hedge foreign currencies and firm commitments. TF

True

51

FV on forward contracts is determined using the spot rates. TF

False, forward rate