4/8/2020 Quiz: Assignment - Derivative Financial Instruments

Assignment - Derivative Financial Instruments

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Started: Apr 8 at 8:37pm

Quiz Instructions
Assignment - Derivative Financial Instruments

Answer format - 12345; no separator.

Write your solution on yellow pad to be submitted upon return to class.

Question 1 10 pts

Forward Contracts

Tau Company operates a seafood restaurant. On October 1, 2019, the entity determined that it will need to purchase
50,000 kilos of deluxe fish on March 1, 2020.

On October 1, 2019 the entity entered into a forward contract with a Bank to purchase 50,000 kilos of deluxe fish on
March 1, 2020 at a price of P50 per kilo.

The market price of the underlying are as follows:

December 31, 2019 – 60 / kilo

December 31, 2020 – 58 / kilo

The discount rate for a similar contract is 8%.

Provide the following:

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4/8/2020 Quiz: Assignment - Derivative Financial Instruments

(a) Fair value of the derivative financial asset or (liability) as at December 31, 2019

(b) Fair value of the derivative financial asset or (liability) as at December 31, 2019

Note - Provide brackets () to your answer if it is a liability i.e. (12345)

Question 2 10 pts

Interest Rate Swaps

Gamma Company received a two-year variable interest rate loan of P5,000,000 on January 1, 2019.

The interest on loan is payable on December 31 of each year and principal to be paid on December 31, 2020.

At the inception of the loan the entity entered into interest rate swap – Variable to Fixed agreement with a bank and
management designated this contract as cash flow hedge.

The interest rate for 2019 is the prevailing interest rate of 10% and the rate in 2020 is equal to prevailing rate on
January 1, 2020.

The market rate of interest on January 1, 2020 is 7%.

Provide the following:

(a) Fair value of the derivative financial asset or (liability) as at December 31, 2019

(b) Interest expense to be reported for 2020

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4/8/2020 Quiz: Assignment - Derivative Financial Instruments

Note - Provide brackets () to your answer if it is a liability i.e. (12345)

Question 3 15 pts

Options

Phi Company produce cotton shirts and the entity needs 50,000 kilos of raw materials in the production process.

On December 31, 2019, the entity purchased a call options as a cash flow hedge to buy 50,000 kilos on July 1, 2020.

The option strike price is P 100 per kilo. The net initial investment for the option totals to P50,000.

The market price per kilo is P110 on December 31, 2019 and P115 on July 1, 2020.

Provide the following:

(a) Fair value of the derivative financial asset or (liability) as at December 31, 2019

(b) Cash to be settled by the Bank to the entity on July 1, 2020

(c) Cost of purchases on July 1, 2020

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