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Chapter Outline
A A derivative is the name given to a broad range of financial securities whose common
characteristic is that the derivative contract’s value to the investor is related to
fluctuations in price, rate, or some other variable that underlies it.
1 A net settlement allows the payment of money so that the parties are in the same
economic position as they would have been if delivery had occurred.
D A futures contract shares essentially the same characteristics as a forward contract, but is
standardized, allowing it to be easily traded in markets.
E Options are a common hedging instrument in which only one of the contracting parties
is required to perform while the other party has the ability, but not the obligation, to
perform. Option types are either call (right to buy) or put (right to sell).
F Swaps are contracts to exchange an ongoing stream of cash flows and are commonly
negotiated on an individual basis.
1 Assets and liabilities are denominated in a currency if their amounts are fixed
in terms of that currency and will be settled in that currency.
a For example, U.S. Company buys merchandise from a Mexican firm for
500,000 pesos, payable in 10 days. The transaction is denominated in
pesos; however, U.S. Company must measure the purchase in U.S.
dollars before it can be recorded. This is done through the use of
exchange rates.
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B An exchange rate is the ratio between a unit of one currency and the amount of another
currency for which that unit can be exchanged. From the viewpoint of a U.S. company:
3 A spot rate is the exchange rate for immediate delivery of currencies exchanged.
4 The current rate is the rate at which one unit of currency can be exchanged for
another currency at the balance sheet date or the transaction date.
5 The historical rate is the rate in effect at the date a specific transaction or event
occurred.
1 The transaction is translated into U.S. dollars at the spot rate in effect at the
transaction date.
a The difference between the recorded balance and the adjusted balance at
the balance sheet date is the exchange gain or loss to be included in
current income.
Questions (13)
Exercises (11)
E12-14 multiple choice questions 20
E12-2[Abe/Poui] Prepare all denominated sales transaction entries 20
E12-3[Sally/Hein/Lemo] Prepare all denominated purchase transaction entries 15
E12-4 [Zimmer] Accounting for foreign-currency denominated purchases
15
E12-5 [Star] Calculate economic income of Star Ltd 15
E12-6 [Wick] Accounting for foreign currency-denominated sales settled
in subsequent year 10
E12-7[Door] Accounting for foreign currency-denominated sales
10
E12-8AICPA 4 short problem-type questions 20
E12-9[Monroe] Various foreign currency-denominated transactions
settled in subsequent year 15
E12-10 [American TV] Various foreign currency-denominated transactions
settled in subsequent year 15
E2-11 [Martin] Accounting for speculative hedges
15
Problems (5)
P12-1 [TCO] The Economics of derivatives 15
P12-2 [Sue] The Economics of derivatives 30
P12-3 [Sue] The Economics of derivatives 30
P12-4 [David/Fernando/Mark] Denominated sales and purchase transaction
entries
30
P12-5 [Pete/Ping/Patay] Denominated sales and purchase transaction
entries 30
Internet assignment
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123
Go to the CNBC.com website and answer questions about commodities.