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Succeed Review Center


DERIVATIVES
1. Marianne Company is a golf course developer that constructs approximately 5 courses each year. On July 1, 2013,
Marianne has agreed to buy 5,000 trees on March 1, 2014 to be planted in the courses it intends to build. In recent
years, the price of trees has fluctuated wildly.
To protect itself from the variability of the market price of trees, Marianne Company entered into a forward contract as
a cash flow hedge with a reputable bank for the purchase of 5,000 trees on March 1, 2014 at a strike price of P1,500
per tree.
If the market price on March 1, 2014 is more than P1,500, the difference is paid by the bank to Marianne. On the
other hand, if the market price is less than P1,500, Marianne will pay the difference to the bank. The market prices of
the trees on December 31, 2013 and March 1, 2014 are P1,700 and P1,800 respectively.
1. What is the forward contract receivable or payable to be recognized on December 31, 2013?
a. 1,000,000 receivable
b. 1,000,000 payable
c. 1,500,000 receivable
d. 1,500,000 payable
2. What was the total amount exchange by Marianne on March 1, 2014?
a. 1,000,000 receipt
b. 1,000,000 payment
c. 1,500,000 receipt
d. 1,500,000 payment
2. Missy Company requires 50,000 pounds of copper each month in its operations. To eliminate the price risk
associated with copper purchases, on December 1, 2013. Missy entered into a futures contract as a cash flow
hedge to buy 50,000 pounds of copper on March 1, 2014. The futures strike price is P100 per pound.
The futures contract is managed through an exchange, so Missy does not know the other party on the other side of
the contract. As with most derivative contracts, this futures contract is settled by an exchange of cash on March 1,
2014 based on the price of copper on that date.
The price of copper on December 31, 2013 is P90 per pound, while the price of copper on the date of delivery is P85.
1. Missy shall recognize a futures contract payable on December 31, 2013 at
a. 1,000,000
b.
500,000
c.
750,000
d.
0
2. What was the total amount exchange by Missy on March 1, 2014?
a. 500,000 receipt
b. 500,000 payment
c. 750,000 receipt
d. 750,000 payment
3. Mary Company makes colorful 10% cotton shirts that are very popular among sophisticated business executives.
Mary uses 50,000 pounds of cotton each month in its production process. On December 1, 2013, Mary purchased a
call option as a cash flow hedge to buy 50,000 pounds of cotton on March 1, 2014. The option exercise price is P50
per pound. Mary paid P50,000 for the call option. This derivative option contract means that if the market price is
higher than P50, Mary can exercise the option and buy the asset at the fixed option price of P50. If the market price is
lower than P50 Mary can throw away the option and buy the asset at the cheaper price. As the most derivative
contracts, this option contract will be settled by an exchange of cash on March 1, 2014 based on the price of cotton on
that date. If the price of cotton on December 31, 2013 is P65 per pound and P70 on March 1, 2014, Mary will
recognize the following amounts:
1. What is the receivable on the call option on December 31, 2013?
a.
750,000
c. 1,000,000
b.
650,000
d.
0
2. What is the gain on the call option to be recognized in 2014?
a.
750,000
c. 950,000
b. 1,000,000
d. 650,000
3. If the price of the cotton on March 1, 2014 is P45 per pound, how much is the loss on the call option to be
recorded by Mary?
a.
50,000
c. 300,000
b. 250,000
d. 200,000
4. On January 1, 2014, Martha Company entered into a two-year P4,000,000 Variable Interest Rate Loan at the
prevailing interest rate of 12%. The 2015 interest payment will be equal to the prevailing interest rate on January 1,
2015. The principal loan is payable on December 31, 2015 and the interest is payable on December 31 of each year.

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During 2014, Martha Company entered into a receive variable, pay fixed interest swap agreement as a cash flow
hedge with a speculator bank at the prevailing rate of interest of 12%. This derivative contract means, that if the rate
is higher than 12%, Martha will receive an interest rate swap payment equal to the difference in rate times the
principal of the loan and will pay the bank an equivalent amount if the rate is lower than 12% on January 1, 2016. If
the prevailing interest rate on January 1, 2015 is 15% and the present value of 1 at 15% for 1 period is .870. What is
the derivative asset or liability to be recognized by Martha on December 31, 2014?
a.
b.
c.
d.

104,400 receivable
104,400 payable
120,000 receivable
120,000 payable

5. On January 1, 2013, Melissa Company received a 4-year variable interest rate loan of P5,000,000 with interest
payment at the end of each year and the principal to be repaid on December 31, 2016. The interest rate for 2013 is
10% and the rate in each succeeding year is equal to market interest rate on January 1 of each year.
In connection with the loan, Melissa Company entered into an interest rate swap agreement as a cash flow hedge
with another financial institution to the effect that Melissa will receive a swap payment if the interest on January 1 is
more than 10% and will make a swap payment if the interest is less than 10%. The swap payments are made at the
end of the year.
On January 1, 2014, the market rate of interest is 14% and on January 1, 2015, the market rate of interest is 12%.
The present value of an ordinary annuity of 1 at 14% for three periods is 2.32 and the present value of an ordinary
annuity of 1 at 12% for two periods is 1.69.
1. What is the interest rate swap receivable December 31, 2013?
a.
b.
c.
d.

169,000 receivable
464,000 receivable
264,000 receivable
338,000 receivable

2. What is the interest rate swap receivable December 31, 2014?


a.
b.
c.
d.

169,000 receivable
464,000 receivable
264,000 receivable
338,000 receivable

6. Merylin Company has the Philippine peso as its functional currency. On October 1, 2014, the company expects to
purchase goods from the USA for $50,000 on March 31, 2015. Accordingly, the company is exposed to a foreign
currency risk. If the dollar increases before the purchase takes place, the company will have to pay more pesos to
obtain the $50,000 that it will have to pay for the goods. On October 1, 2014, Merylin entered into a foreign currency
forward contract with a bank speculator to purchase $50,000 in six months for a fixed amount of P2,500,000 or P50 to
$1. This forward currency contract is designated as a cash flow hedge of the companys exposure to increase in
dollar exchange rate. On December 31, 2014, the exchange rate is P52 to $1 and on March 31, 2015, the exchange
rate is P53 to $1. What is the derivative asset to be reported by Merylin Company on December 31, 2014?
a.
50,000
b. 150,000
c. 100,000
d.
0

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