FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006

PROBLEM 1 Decline in
rates (Gain
X Trading purchases goods from Y, a company based on France for 1,200,000 Euros (€). The on the part of
exchange rate at this time is P1 = €12.5. X pays 22 days later when the prevailing exchange a buyer) 0.02
rate is P1 = €16.
How much is the foreign currency gain/loss on the books of X and Y respectively? x Price of the 1,20
A. P21,000 gain; P21,000 loss product 0,00
B. P21,000 gain; 0 purchased 0.00
C. P4,200,000 loss; 0
D. P4,200,000 loss; P4,200,000 gain Gail (Loss) 21,0
on forex 00.0
(B) transaction 0
For payment, the currency used is
Euros. X Trading is the company
that used foreign exchange. PROBLEM 2
Whereas, Y company has been using euros
as its currency so no forex transaction in its Celica Motors sold a car for P180,000 pounds (£) to a customer in London on March 16, 2013
case. Y Company received the payment in when the spot rate was P68.45 = £1. On April 20, 2013, Celica received thirty percent of the
euros. selling price as partial payment. The spot rate at that time was P67.48 = £1. The balance was
paid on May 5 when the spot rate was P68.63 = £1.
X
How much was the foreign currency gain/loss on this transaction?
Tra
A. P29,700 loss
ding Y
Please note B. P29,700 gain
that the C. P142,200 loss
exchange rate D. P142,200 gain
(Pes (Eur is for problem
o) os) use only. (A)
Date of Real exchange
purchase 96,0 1,200 rates are not Direct exchange rate:
(1200000/12. 00.0 ,000. taken into
Spot rate
5) 0 00 consideration.

12,321,000.0
Date of 75,0 1,200
Celica Motors (seller) 180,000.00 68.45 0
payment 00.0 ,000.
(1200000/16) 0 00
Down payment 54,000.00 67.48 3,643,920.00
21,0
Forex Gain / 00.0 Balance 126,000.00 68.63 8,647,380.00
(Loss) 0 - Gain (Loss) on forex
transaction (29,700.00)
The exchange rate used
herein is indirect. To get the
It was a loss because at the time of purchase, the peso value was
direct exchange rate:
12,321,000.
Date of The peso value received by the seller for down payment and balance is
purchase only 12,291,300.
(see formula) 0.08 Thus, there is a forex loss
of P29,700.
Date of
payment 0.06
To a seller, any decline in currency value of a receivable is a loss, because he
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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
would be receiving less. On January 1, 2013 Lucky Inc. paid P9,800 to acquire a put option. This is in relation to the sale
To a buyer, any decline in currency value of a payable is a gain, because he of merchandise worth $65,000. (Strike price = P4.965)
would be paying less. 1/1/2013 3/31/2013 6/20/2013
Vice versa for an increase in currency Spot rate P4.934 P4.908 P4.75
value. Fair value of option P9,800 P11,400 P13,935
How much is the foreign currency gain/loss on the intrinsic portion on March 31, 2013?
PROBLEM 3 A. P1,690 B. (P1,690) C. P1,600 D. (P90)
Levin intends to sell ¥400,400 under a forward contract dated December 1. At what amount (A) Correction on the problem: The FV of option on
must Forward Contract Receivable and Forward Contract Payable be presented on December 6/20/2013 is 13,975.
31?
1/1 3/31 6/20
Dates Forward Rates Spot Rates Fair value of put
December 1 P 0.55 P 0.53 option 9,800.00 11,400.00 13,975.00
December 31 P 0.50 P 0.49
March 22 P 0.48 P 0.46 - Intrinsic value 2,015.00 3,705.00 13,975.00

FC Receivable FC Payable Time value 7,785.00 7,695.00 -

A. P220,220 P200,200
B. P200,200 P220,220
The intrinsic value may be computed as (Strike price minus spot rate) x foreign
C. P212,212 P196,196
currency.
D. P200,200 P200,200
On March 31, the gain would be 3705 minus 2015 = 1690. (The intrinsic value
increased, so it's a gain.)
(A)
Levin is a buyer of goods, and a seller of foreign currency under a forward contract. Hedging
is setting aside a fund to a bank or financial institution that is willing to absorb any gain or PROBLEM 5
loss resulting from a hedged transaction.
It is called a hedged transaction because, no matter what the spot rates are, the On November 1, 2013, Word Inc. paid P45,000 to acquire call foreign exchange option for
buyer (or seller) who made a hedged contract, he would be paying (or receiving) the Hk$90,000. The option is acquired to hedge the 2013 anticipated purchase of merchandise for
stated amount in the hedge contract. Hk$90,000. The option expires on March 30, 2014.
FC
Receivable FC Payable 11/1/2013 12/31/2013 3/31/2014
400400 Spot rate P3.46 P3.40 P3.39
x0.55 220,220.00 Fair value of option P45,000 P50,500 P72,000
Strike price P3.47 P3.47 P3.47
400400 x
0.50 200,200.00 At what amount must the merchandise be presented as of December 31, 2013?
A. P3,114,000 B. P3,123,000 C. P3,060,000 D. P0

As a buyer of goods (hedged transaction), he would be recording his payable using current
D
rates. So, on December 31, his payable is 400400 x 0.50. You use the forward rates because
it was done through a forward contract.
As a seller of forex (hedging instrument), he would be recording the value There's that phrase "anticipated purchase". The purchase hasn't happened yet although
of the forward contract at its value upon incepcion (December 1). So, it they already acquired a hedging instrument.
would be 400,400 x 0.55. Since the purchase hasn't occurred yet, no
merchandise would be recorded.

PROBLEM 4
PROBLEM 6

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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
On December 12, 2013, Winning Co. entered into a forward exchange contract to purchase
225,000 euros in 90 days. The relevant exchange rates are as follows:

Spot rate Forward rate (for March 12, 2014 PROBLEM 9

November 30, 2013 P0.57 P0.59
December 12, 2013 P0.58 P0.60 Manila Company sold merchandise for 315,000 pounds to a customer in London on November
December 31, 2013 P0.62 P0.63 01, 2013. Collection in British pounds was due on January 30, 2014. On the same date, Manila
entered into a 90-day futures contract to sell 315,000 pounds to a bank. Exchange rate for
The purpose of this forward contract is to hedge a purchase of inventory in November 2013, pound on different dates are as follows:
payable in March 2014. Nov. 1 Dec. 31 Jan. 31
At December 31, 2013, what amount of foreign currency transaction from this forward contract Spot rate P51.3 P52.6 P51.8
should Winning include in profit or loss? 30-day futures P52.2 P52.4 P53.1
A. P9,000 loss B. P6,750 gain C. 6,750 loss D. P9,000 gain 60-day futures P51.7 P52.1 P52.5
90-day futures P50.5 P52.5 P53.3
PROBLEM 7
How much is the net foreign exchange gain or loss on January 30, 2014?
On October 1, 2013, R Corporation purchased goods from a U.S. based corporation worth
A. P63,000 loss B. P31,500 loss C. P63,000 gain D. P31,500 gain
$93,750. Payment is due in 120 days on January 30, 2014. In view of the transaction, R
Corporation enters into a forward contract to buy $93,750 from Philippine National Bank (PNB) PROBLEM 10
in 120 days. The relevant exchange rates are as follows: On November 1, S Company entered into a firm commitment to sell a machinery. Delivery and
passage of title would be on February 28, 2014 at the price of $15,750 Singapore dollars. On
10/01/2013 12/31/2013 1/30/2014
the same date, S Company entered into a 120-day forward contract with China Bank to sell the
Spot rate P43 P47 P50
$15,750 Singapore dollars. Exchange rate were as follows:
Forward rate P44 P46 P50
Spot rate Forward rate
Which of the following is correct? November 01, 2013 P46.25 P44.30
A. Forward Contract Receivable on Dec. 31, 2013 is P4,125,000
December 31, 2013 P47.40 P46.70
B. Net foreign exchange loss on settlement date is P93,750
February 28, 2014 P49.50 P49.50
C. Foreign exchange gain on the derivative instrument on the transaction date is P187,500
D. Foreign exchange loss on the importing transaction on year-end is P375,000 How much is the foreign exchange gain or loss recognized by S Company on the firm
commitment on December 31, 2013?

PROBLEM 8 A. P18,112.50 gain B. P18,112.50 loss C. P37,800 loss D.

P37,800 gain
On October 31, 2013, Pointers Philippines took delivery from a British firm of inventory costing
£1,450,000. Payment is due on January 31, 2014. At the same time, Pointers paid P16,500 cash PROBLEM 11
to acquire a 90-day call option for £1,450,000. SBC Company bought merchandise for €625,000 from a French company on December 1, 2013.
10/31/2013 12/31/2013 1/31/2014 Payment in Euros was due on February 28, 2014. On the same date, SBC entered into a 90-day
Strike Price P12.60 P12.60 P12.60 futures contract to buy €625,000 from Metro bank. Exchange rates for Euros on different dates
Spot rate P12.61 P12.62 P12.64 are as follows:
Forward rate P12.72 P12.77 P12.78
Dec. 1 Dec. 31 Feb. 28
Fair Value of Call Option ? P34,000 ?
Spot rate P61.55 P62.85 P62.05
30-day futures P62.45 P62.65 P63.35
Given the information above, compute for the following:
60-day futures P61.95 P62.35 P62.75
Foreign exchange gain or loss on option contract due to change in time value on December 31,
90-day futures P60.75 P62.75 P63.55
2013, and foreign exchange gain or loss due to change in intrinsic value on January 31, 2014.
A. P3,000 gain; P29,000 gain C. P10,500 loss; P29,000 gain How much is the foreign exchange gain/loss on the forward contract on February 28, 2014?
B. P10,500 loss; P14,500 gain D. P3,000 gain; P14,500 gain

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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
A. P500,000 loss B. P187,500 loss C. P187,500 gain D. P500,000 Total Assets S$ 8,512,500 S$ 8,587,500
gain Liabilities and Equity
Accounts Payable S$ 825,000 S$ 1,125,000
PROBLEM 12 Long-term debt 4,837,500 4,275,000
Common stock 1,725,000 1,725,000
GV Company anticipates the price of cement will increase the coming months. Therefore, it
Retained earnings 1,125,000 1,462,500
decides to purchase call options on cement as a price-risk hedging device to hedge the
Total Liabilities and Equity S$ 8,512,500 S$ 8,587,500
expected increase in prices on a forecasted purchase of cement. On December 1, 2013, GV
purchased call options for 1,200 sacks of cement at P165 per sack at a premium of P5 per sack,
Relevant exchange rates are:
with a March 31, 2014 call date. The following is the pricing information for the term of the call:
January 1, 2012 S$ 1 = P 45
Date Market Price Fair Value of Option Contract December 31, 2012 S$ 1 = P 42.50
December 1, 2013 P165 December 31, 2013 S$ 1 = P 47.50
December 31, 2013 P168 P7,500 Average 2012 S$ 1 = P 43.75
March 31, 2014 P172 September 12, 2012 S$ 1 = P40

On March 31, 2014, GV exercised the option and acquired 1,300 sacks of cement. On May 15, TRANS Corp. formed the subsidiary on January 1, 2012. Income of the subsidiary was earned
2014, GV sold all the sacks of cement for P176 per sack. evenly throughout the years and the subsidiary declared dividends worth S$75,000 on
How much is the net income in 2014? September 12, 2012 and none were declared during 2013.
A. P13,600 B. P9,700 C. P7,600 D. P1,400 How much is the cumulative translation adjustment for 2013?
A. P9,093,750 B. P8,531,250 C. P15,093,750 D. P13,125,000
PROBLEM 13

On July 1, 2013, Peru Company purchased 1,750 shares of Lima Corp. common stock at a cost
of P75 per share and classified it as an available for sale security. On October 1, Peru Company
purchased an at-the –money put option on Lima Corp. at a premium of P24,500 with a strike
JOINT ARRANGEMENTS (IFRS 11)
price P115 per share and an expiration date of April 2014. Peru Company specifies that only the
intrinsic value of the option is to be used to measure effectiveness. The following shows the fair PROBLEM 1
value of the hedged item and the hedging instrument.
GX Builders Corp. and JQ Progress Co. are two companies whose business are the construction
10/1/13 12/31/13 3/3/14 4/17/14 of many types of public and private construction services. They set up a contractual
Lima’s share price P115 P103 P95 P95 arrangement to work together for the purpose of fulfilling a contract with the government for
Intrinsic value 0 P21,000 P35,000 P35,000 the construction of a motorway between two cities for P144 million fixed price contract.
Time value P24,500 P15,050 P3,710 0
Fair value P24,500 P36,050 P38,710 P35,000 The contractual arrangement determines the participation shares of GX and JQ and establishes:

 Joint control of the arrangement

What is the cumulative effect on retained earnings of the hedge and sale?  The rights to all assets needed to undertake the activities of the arrangement are shared by
A. P10,500 B. P70,000 C. P45,500 D. P80,500 the parties on the basis of their participation shares in the arrangement.
 The parties have joint responsibility for all operating and financial obligations relating to the
PROBLEM 14 activities of the arrangement on the basis of their participation shares in the arrangement;
and
TRANS Corp. owns a subsidiary in Singapore whose statement of financial position in Singapore
 The profit and loss resulting from the activities of the arrangement is shared by GX and JQ
Dollars for the last two years follow:
on the basis of their participation shares in the arrangement.
December 31, 2012 December 31, 2013
In 2013, in accordance with the agreement between GX and JQ:
Assets
Cash and cash equivalents S$ 450,000 S$ 375,000  GX and JQ each used their own equipment and employees in the construction activity
Receivables 1,837,000 2,212,500  GX constructed three bridges needed to cross rivers on the route at a cost of P48 million
Inventory 2,400,000 2,550,000  JQ constructed all of the other elements of the motorway at a cost of P60 million.
PPE, net 3,825,000 3,450,000

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FOREX TRANSACTIONS, DERIVATIVES & HEDGING, TRANSLATION OF FS #0006
 GX and JQ shares equally in the P144 million jointly invoiced to and received from the  Operating expenses (including depreciation) incurred for the year, P21 million
government.  Rental income collected for the year, P72 million
 Each venture receives a share of the income or loss from rental income net of the operating
1. What is the gross profit of the joint arrangement? expenses.
A. P48 million
B. P84 million 1. What is the interest of RK Developers in the joint venture as of December 31, 2012?
C. P36 million A. P84 million
D. P24 million B. P86.7 million
C. P90 million
2. What is the gross profit earned by GX in 2013? D. P120 million
A. P36 million 2. What is the net income (loss) of entity DP on December 31, 2013?
B. P84 million A. P51 million
C. P24 million B. P72 million
D. P12 million C. P93 million
D. P63 million
PROBLEM 2 3. What is the interest of SV Holdings in the joint arrangement as of December 31, 2013?
A. P112.2 million
Two real estate companies, RK Developers and SV Holdings set up a separate vehicle (entity
B. P87 million
DP) for the purpose of acquiring and operating a shopping centre. The contractual arrangement
C. P60 million
between the parties establishes joint control of the activities that are conducted by entity DP.
D. P84 million
The main feature of entity DP’s legal form is that the entity, not the parties, has rights to the
assets and obligations for the liabilities relating to the arrangement. These activities include the *** END ***
rental of the retail units, managing the car park, maintaining the centre and its equipment,
such as lifts, and building the reputation and customer base for the centre as a whole.

The terms of the contractual arrangement are such that:

 Entity DP owns the shopping centre. The contractual arrangement does not specify that the
parties have rights to the shopping centre.
 The parties are not liable in respect of the liabilities of entity DP. If entity DP is unable to
pay any of its liabilities, the liability of each to any third party will be limited to the parties
unpaid contribution.
 The parties have the right to sell or pledge their interests in entity DP
 Each party receives a share of the income from the shopping centre (rental income net of
operating costs) in accordance with its interests in entity DP.

Transactions of the contractual arrangement for 2012 and 2013 follow:

2012

 RK and SV contributed P60 million each for a ½ interest in the net assets of Entity DP.
 Organization expenses incurred amounts to P600,000.
 Entity DP acquired land at a cost of P12 million.
 Constructed a building (shopping centre) at a cost of P90 million.
 Operating expenses for the year amounts to P6 million.
 Rental income collected from the tenants, P60 million
 Net income or loss is distributed to the venturers in accordance with their interest.

2013
5