Derivative Contracts

On August 10, 2020, SM Company entered into a contract with Caterpillar, Inc., based in USA,
to purchase a manufacturing machinery used to produce their latest products. The machinery,
amounting to USD150,000, will be delivered on November 8, 2020. It will be paid on the day of
delivery. However, during this period, SM knew that fluctuation in forex is imminent. Hence, on
⁸that same day, SM entered into a 90-day contract with BDO to buy USD150,000 for
PHP7,500,000 on November 8, 2020 to hedge the impact of forex fluctuation.
Meanwhile, SM was advised to deposit the money to generate income while waiting for the
machinery. SM entered a 90-day time deposit with BPI having a variable interest rate base on
the BSP Peso Deposit Rates. (Assume that BSP-PDR for time deposit on August 10 is 2.5%)
Anxious about the interest rate to drop, SM entered a contract with Metrobank to sell the 90-day
time deposit with an interest rate of 2.5%.
On November 8, 2020, the spot rate is PHP53:USD1. BDO gives USD150,000 to SM for
PHP7,500,000. Caterpillar, Inc. delivers the machinery and SM pays them USD150,000. On the
same day, BSP-PDR was spotted at 3%.
For the rates, please refer to table below

August 10, 2020 September 10, October 10, November 8,

2020 2020 2020
Spot rate Php50 Php49.5 Php 52 Php50.5
Price rate of
No available
contract with Php50 Php51 Php49
data
BDO
Interest rate on
2.5% 2.3% 2% 3%
BSP-PDR

For questions 1 to 5
1. What kind of derivative contract entered by SM and BDO on August 10, 2020?
a. Options Contract
b. Ordinary Contract
c. Forward Contract
d. Swaps Contract

2. What kind of derivative contract entered by SM and BPI on August 10, 2020?
a. Options Contract
b. Ordinary Contract
c. Forward Contract
d. Swaps Contract

3. One of the characteristic of a derivative is that its value changes in response to the
change in what we called “underlying”. In the situation above, what are the underlying?

I. Foreign exchange rate

II. Date
III. Interest rate in BSP-PDR
 IV. Price of contract with BDO

a. I and II
b. I and III
c. I, III and IV
d. I, II, III and IV

4. If SM did not enter into any derivative contracts on August 10, 2020, what is its standing
on November 8, 2020?
I. Loss on purchase of machinery
II. Loss on interest income received
III. Gain on interest income received
IV. Gain on purchase of machinery

a. I and II
b. I and III
c. II and IV
d. III and IV

5. Referring to the table above, you will see the word “No available data”. Honestly, the data
was already provided. What should be the price of the contract?

a. Php50
b. Php51
c. Php50.5
d. Php49