.

- Chopter 12
Derivalives os Hedging Instrument
in .Mqnaging Foreign Currency Exposures

t. lnlroductio

Componies need to rnonoge their risks. Monogemenl hos io develop o voriety. of

finoncio! inslrumenls to monoge their business risks. Ihose componies operoling
internotionolly ore subject not onty to the normol business risks but ore typicolly subject
to odditionai rjsks from possible chonges in cvnency exchonge roles becouse they ore
tronsocling in more fhon one currency. Muttinalionol entiiies mctnctge lheir foreign
cwrency risks by using one of severol types of finoncial insiruments: (l) loreign cwrency
forword conlrocts; (2)ioreign cwrcncy opfions, (3) foreign cuffency futures snd (4) foreign
cwrcncy swops.

ln this chopter, the discussion will focus on the ihree lypes of derivotive financiol
inslrumenfs for foreign currency: (l) forword conlrdcls, (2) options and (31 fulures which
ore commonly used to hedge foreign cutrency exposures. Swops wi/l be discussed on
the topic of inferesf-rofe exposures.

Managing commodily risks ond inferesf-rqfe risks will nof be covered in this monuol
becouJe of exclusively clouse in the new syllobus of CPA Examinalion effective October
2013.

il. Typel of Derivotives

porogroph g ol PAS 39 defines o derivotive. derivolives derive their volue from onother
underlying item such os o shore price or on inleresl rote.

Typicol exomples of derivotives ore fulures ond forwords, swop ond option confrqcfs. A
derivolive usuolly hos o notionol omounl, which is o curency, o number of shores or other
unils specified in o conkoct.

Derivotives con generolly be cotegorized one of the following two cotegories:

\
L Option-bqsed derivqlives (exomples ore option controcls, inleresl rote cops, ond
interest role floors). Under these controcts, it hos o "one-sided exposure" wherein
only one porty'con be polenliolly hove o fovoroble outcorne for which il poys o
premium of inceplion; the olher porty con potentiolly hove only on unfovoroble
outcome for which it is poid the premium ot inception. consequenlly, only lhe
downside risk on lhe hedged ilem is counletbolonced.

635
636 Chapter !2

2. Fonrvqrd-bosed derivolives (exomples ore forworcls, futures, ond swops). Under ihese
conlrocls, il hos q "lwo-sided expoiure" wherein either poriy (but noi both
simultoneously) con poteniiolly hove o fovoroble outcome ond either porty (but
not both simultoneously) con hove on unfovoroble oulcome. Consequenlly. lhe
downside risk ond the upside polenliol on lhe hedged ilem ore counlerbolonced.

lll. Accounting for Foreign currency Derivotives ond Hedging Activities

A hedging operolion is lhe purchose or sole of foreign curency controcls lo offset lhe risks
of holding receivobles ond poyobles denominoied in o foreign curency. The usuol woy of
ovoiding risks on file chorocter oi exchonge role is lhrough forword controcts.

For derivolives inslrumenls lo quolify os hedging inslrumenls, lhe following lwo crilerio musl
be mel:

l. sufficienl documenlolion must be provided ot the beginning of lhe hedge lerm to

identify the objective ond strotegy of lhe hedge, tne neoging inslrumenl ond the
hedged item, ond how the hedge's effecliveness will be qssessed on on ongoing
bosis.

2. The hedge rnusl be highly efrective lhroughoui ils terrn. Effecliyeness is viewed os
the derivotive instrumenl's obility to offset chonges in the foir volue or cosh flows of
the hedged item within lhe ronge belween 80 ond 125 percenl of lhe chonge ln
vqlue ol the hedged ilem.

Assessing Hedge Effecliveness

l. A hedge is highly effective (effectiveness) if there will be on opproximote offset,

Highly
Chonges in foir Effective Chonges in the foir
volue ol the cosh Offset volue or cosh flows
flows of lhe (80%to of lhe hedging
r2s%) inslrumenl

2. lnitiol expection must be thol lhey'blmost fufy offset,,

3. Actuol offselling wilhin o ronge ot B0% to l2S% is occeptoble
4. Method of ossessing hedge effectiveness depends on ihe documented risk
monogement strotegy
5. No single method for ossessing hedge effeclives is prescribed, bul time volue of money
shoutd be cpnsidered (refer to discussion on Split AccOunting|

Splil Accouding in Assessing/Meosuring Hedge Effecliveness

PAS No, 39 requiresoll derivqtives to be volued ol lheir foir volues. Thus, bolh lhe lime
volue element ond the intrinsic volue elemenl ore volued of foir volue. Accordingly, the
need to delermine the breokdown of the lotol foir vqlue occurs only itsplif accointing is
used.
Derivatives as ITedging Instrunleilts in Managing Foreign Currency Exposures 637

lnlrinsic volue moy be viewed qs being conceptuolly difierent from the time volue; it
iheoreticolly con be occounted for separotely from the time vqlue. Corving out the lime
' value element ond reporting its goin or loss sepqrotely from ihe monner of reporting the
inlrinsic volue elernenfl goin or loss is referred to os splif occounling.

lnlrinsic volue is lhe incremen lol premium poid (difference between the spol price ond the
exercise price - to be ploced in ihis fovoroble positionl. The enlire premium is colred the tirne
volue (time volue is onologous io o prepoid insuronce thot could be omorlized over lhe life
of lhe oplion period).

PAS No. 39 permils (bul does not requke) qn entily'lo excrude oll or port of q derivotive's
time volue eternent in ossessirrg hedge effeciiveness. Ihus, splil occounting (occounling
lor lhe [44e.-ygluC-glg4e!| in seporole monnerlrom the inllinsic volue eretnenf) is petmitled.

. Forloword controcls purposes, lime volue etement opplies Io premium ond discounh on
forword rofes.

ll hedge eltecliveness were ossessed by excludin g lime volue elemenf, lhe presumed
chonge in foir vslue of lhe foreign curency commitment would be bqsed on lhe chonge
in fhe spof role - nol ihe chonge in the forwsrd rote. Thus, one compores:

l Only the foreign currency forword's intrinsic volue chonge (oilributoble lo lhe chonge
in lhe spot rote| with,
2. The chonge in the foreign currency commilmenl's foir volue using lhe chonge in the
spot rote.

lV. Bosic Accounting lssue lnvolving Hedging ond Hedge Accounling

Hedging conkosts with hedge accounling, os follows:

F Hedging chonges risks, whereos hedge occounting chonges lhe ococunting
for goins ond losses.
F Hedging ond hedge occounling ore bolh optionql qctivilies {even when o
position is hedged, the eniily does not hove io use hedge occounling to
occounl for the tronsoclion).
F Hedging is o business decision - hedge occounling is on occounting decision.
) Hedging occounting is ollowed only when hedging inshument is o:
. derivotive (other lhon o written opiion|.
. wrillen ollion when used to hedged o purchosed oplioru or
. nonderivotive finonciol osset or liobility when used lo hedged
foreign cunency risks.
> A hedging inslrumenl might not be designoted for only o portion ol the time
. period over which the instrur,rrent is oulslonding,

Hedging, for occounting purposes, meqns designqting o derivotive finonciol instrument

os on offset in nel profil or loss, in whole or in porl, to the chonge in foir volue or cosh flows
of o hedged ilem.

A non-derivotive finonciol insirument moy olso be o designoted hedging instrumenl, bui

only with respecl to hedge foreign cunency risks.
 The designdlion musl be in writing, up froni (no retrospective designotions), ond be consisleni
. with on esloblished.risk monogement skotegy. ln essence, PAS No.-39 hedge occounflng is noi
mondolory. lf on enterpine does noi wont to use hedge occounling, it simptv does not deiignoie
o hedging relotionship.
The bqsic occounting issue for hedging is deiermining whelher the goin or loss on the
hedging instrumeni con be reporled in eornings in lhe some period in w6icn tne loss or goin
on lhe hedged item occurs. Two possibilities exisl to ochieve concunent recogniiion:-

l. lmmediofe recognition. Recognize both cunently in eornings (in which cose

they most likely would be netted ogoinsl eoch olher tor"Oisptoy prtporei
insteod of showing both the goin ond loss).
2. Delayed recognilion. Defer recognition of both until they both con be
recognized in eornings loler ol lhe some time.

Hedge occounling recognizes symmekicolly lhe offselling effects on net protit or loss of
chonges in the foir volues of the hedging inslrumenl ond lhe relqled item being hedged.

PAS No. 39 identifies lhree types of hedge:

l. Fqir volue hedge - this hedges ogoinsl lhe risk of chonges in the foir volue of o
recognized osset or liobility or on unrecognized firm commilment (or poriion of
such ossef, liobility, or firm commitment) qttributoble lo o porliculor risk. Such qs
the foir volue of fixed rqie debt will chcinge os o resull of chonges in inieresl
roles.

2. Cosh llow hedge - this hedges ogoinsl the risk of chonges in expecied cosh
' flows. it is o hedge of the exposure lo voriobility in cosh flows thot ii ottributqble
to o oprticulor risk ossocioled wilh:

o qsset or liqbilily suih os future interesi poyments or vqriobte-

fii::.:fl:,$?
b. A highly proboble forecosted tronsoction such os o forecqsted sole or
purchose lhot will qffect future reporled profil or loss.

3. Hedge ol s nel inveslmenl in loreign operolions..

Under the fair volue hedge, it sholl be occounled for os follows:

(o) ihe goin or loss from remeosuring the hedging insirument of fior volue (for o derivotive
hedging instrument) or the foreign currency componenl of ils ccirrying omount
meosured in occordonce with PAS 2l {for o non-derivotive hedging insirurienf; sfrof
be recognized in prolit or loss,. ond
(bl lhe goin or loss on ihe hedged ilem ottributoble to the hedged risk sholl o{ust lfre ccryhg
omount of the hedged ilem ond be recognized in prolff or loss 'This opplies if me freOipi
iiem is olherwise meosured ot cost. Recognized 6t the goin or toss o*iouloue lo-lte
hedged risk in profit or loss opplied if the hedged itgm is on dvoiloble.for-sqle frlonclc osset-

on the other hond, o cosh llow hedge sholl olso be occounted for os follows:
(ol lhe portion of the goin or loss on the hedging instrument lhol is delermined lo be on
effective hedge sholl be recognized os othlr tomprehensive income,. ond
(b) the ineffective porlion of the goin or loss on the hedging instrument sholl be recognaze€t l?
prolil or loss.
Derivatives as Hedging Instruments in Managing Foreiin Currency Exposures 639

Hedges of d nef lnyeslmenl in o foreign operalion, including o hedge of o monetory ilem thol is
occounled for os port of lhe net investment, sholl be occounled for similorly to cosh flow
hedges:
(o) the portion of the goin or loss on the hedging inslrument lhot is delermined to be on
effective hedge sholl be recognized os olher cornprehensive income,' ond
(b) lhe ineffecfive- portion slroll be recognized in profit or loss.
Forwqrd Conlrocls

Aloword conlract is on ogreement between o buyer ond o seller thol requires lhe delivery of
some commodity ot o speciReO future dote ot.o price ogreed lo lodoy {the exercise price}. A
typicol exomple of loruotd conlrocls is FOREIGN CURRENCY FORWARp CONTRACTS.
A foreign cunency forwqrd conlracl is cn ogreern enl to buy or sell o loreign cutency ol:.

(l) o specified future dole (usuolly wilhin l2 months), ond

(21 rr specified exchonge rqte. Th is rqle is colled the forword roie.
A the inception of the conirocl, the forword rote normolly vqries from thespol rote. The difference
belween lhe lwo rofes is refened fo qE o drbcounf (premium) it the forword rofe is less lhqn
(grealer thon) lhe spol rofe.

The use of forword conlrqcts includes the following:

Hedge
o. Forword controch used os o hedge of a loreign cwrencY fronsqcfion. These include
imporling and e>q,oiling transocli6ns denominsted in toreign cunency. These hedges
do not quolify for hedge occounling under PAS No. 39 becouse lhe foreign exchonge
goins ond losses ore alreody repoded ol morkei volue on the bolonce sheet.

b. Fotwordconhscfs used os o hedge of on vnrecognized firnr commifmenf (This lype

of hedge ore now lreofed os s lair volue hEdges roiher lhqn cosh flow hedges.
However. PAS No. 39 por. 87 clorifies th<rt o hedge of lhe foreign currency nik of o
fiim commitment con be treoled os eiiher c cosh flow hedge or foir volue hedge!.
Hedge accovnting rutes apply. Both the chonge in lhe volue of the hedge qnd lhe
vqlue of the hedged ilem ore reported in earnings (before the conlrocl is reported
in the books).

c. Forward conlrocl used qs o hedge of o foreign-cunency-denomlnqfed 'forecqsfecf'

trqnsoction (o cosh flow hedge). initiolly foreign exchonge goins ond losses on lhe
hedging instrument ore recognized in eguify, while no offseffing omount is reporled
on the hedged item. Evenluolly. the exchonge goins ond losses will be reported in
eornings in lhe period the hedged ilems offect eornings (i.e., if lhe item hedged is o
forecosted pur.chose of invenlory, the goins qnd losses on the hedge con be
erclossified into eornings when inventory is sold, or when o forecosted purchose of
equipment, the goins ond losses on the hedge will be reclossified into eornings os th
e equipment is dePrecioted.)
d. Fotward conlrocls os o hedge of o nel invesfmenl in foreign operofions.
Speculolion. Forword conlrocls used lo speculote chonges in foreign curency. Foword
role should be used becquse o firm speculoting in foreign currency chonges in exposed to
the risk of movements in the forword role. Foreign exchonge goins ond losses ore reported
cunently in lhe income slolemeni.
 640 Cltapter l2

Oplion Conlrqcls
An opfion conlrqct belween lwo porlies - the buyer orid ihe seller.- gives the buyer
ho]de.r) ihe right, but not the obligoiton, lo purchose or sefl something toihe option-#tter {option
i;pii;;
writer) ot o dote in lhe fulure ot o price ogieed to ot the time the ofrion contioct ls excni:riged.
Aforeign cunency oplion conlroct is o contrqcluol ogreement giving ihe holder lhe right to but
or sell q given omouni of cunency ot o specified price- (the exerdise o'r sirike pricel tor o"perioJoi
lime or o poinl in time.

Oplion Ierminologies
l. Cqll is on option to buy
2. Pul is on oplion io sell
3. Holder is the porty hoving lhe right to buy or sell
4. from lhe perspeclive of lhe holder, lhe oplion conlrqcl is refened to qs s purchosed
Option.
5. Wdter.is the porty lhot qronts lhe holder this confrqcluol right.
6. From the perspecllve ol lhe wriler, the option conlrocl is-refened lo qs o wrilten
Option.

Forelgn Gunency Oplion Siluolions

Spol Morkel Price is Spot Morket Price
Spof Morket price Equo/s Mare Thon lhe Exercise is Less lhon lhe
fhe Exercise Strike price Slike Price Exercise Sfrike Price
Option (Ps = Ps) (P6 > P5) {Ps < P6J
Catl (buy)
Pul (selD
Al ihe money
Al lhe money ,lq t\e money '
Out ot lhe money
Out of lhe money
-
tn lhe money
ln lhe-money - the holder would exercise the oplion since it is fovoroble lo him.
out of lhe money - lhe holder would not exercise the option since it is unfovoroble lo him.
Accounllng lor Foreign Cunency Option premlums
Tlme Vslue €lemenL lf qf the irnception ol the lorelgn curency oplion, the oplion is eifher out of
the money or of fhe maney, the entire premiurn-is cotted
onologous.lo o prepoid insuronce premium lhot could be omorlize lo income
in{iii6 rne li;;;.il;l;
"arrd. over the life of lhe
oplion period.
lnlrinslc Vqlue. on lhe other hond, il oi lhe inception of lhe foreign curency option, lhe
is in the money---lhe option. holder will hqve poib o nigner premiJ. in. incrbmentot oplion
equoling lhe difference between spot morkei price oni thd exercise -srrite piice
oniou-ni
-io b;;k;;
in |hls lovorEble posilion. rhis incrernentol preiium pord is coneolrrllo.ei,rin iunencfs
volue. ;t f;;tc
The value.of,,on option con be reolized either through exercrse of the
option ar through cosh
sefllemenf. lf the option con be exerched onv timi during rf,e spec,fieb period, 1 n Terenea
fo os on American option: if it is exercisoble on/y ot tie rrlal'uiily aate/expiration dt the
conlrocl, il is refened lo qs o Evropean option.
The inlrinsic volue of o forword contrqcl io sell o.commodity or cunency is determined
comporing the spot role/price ot lhe dote of inceplion ot tne forworo io tnb sporroteTprice by
o loler voluolion dote. oi

Al dqte of.inceplion of the forword, lhe difference between the forword rr:ie ond
spot
the totol lime vqlue of the conlroct. Bolh the intrinsic uorue oio time volue per itemrepresent
multiplied by the notionsl cmount in order lo cqtculote il e rJspeCiiul totot votues. r;u;i b;
Derivatives as Hedging Instruments in Managing Foreign Currency Exposures . 64 I

A coll opiion hos inlrinsic volue only it the strike price/exercise price is below the cunent spot
price/morket price. ihus, o coll oplion is used when o foreign curency is needed lo poy o liobility
in lhe future.

On lhe other hqnd, o put option hos intrinsic volue only if lhestrike price/exercise pice con sell it ol on
qmounl greoter lhon the cunent spot price. A put option is used when foreign curency received in lhe
fulure needs lo be sold ond converled into pesos.

The difference belween these lwo volues (i.e., the spol price ond exercise price) limes lhe
notionol omounl represents lhe tolol inlrinsic volue.
The iime volue of on option is meosured by sublrocting lrom the foir (totolf volue of lhe oplion
io the inlrinsic volue.
Fulures Conlrqcls

Alutures contrccf is lhe some lhing with forword conlrocts except lhol insteod of being negolioted
between hvo porlies. lhe controcl is o slondord one thot is sponsored by on orgonized exchonge.
Wifh o lutures contrqcl, the exchonge hondles lhe cosh selllemenls between the two pqrlies to
the conlrocl. Accordingly, with o futures conlroct, lhe two porties to the ogreement olmost
never direcily conlocl one qnother. This is not lrue with forword controcls becouse lhey ore
directly negotioted between the two porties.

Swop

o controct in which two porties ogreed lo exchonge poymenls in lhe fufure bosed on
A swop is
the movement of some ogreed-upon price or role.
The mosl common type of swop is qn lnleresl rolg swap. ln on interesl role swop, lwo porties
ogree to exchonge lulure inleresl poymenls on o given loqn omounl; usuolly. one sel of inleresl
poymenls is bosed on fixed inlerest role ond lhe other is bqsed on o vorioble interest role.
Swopr. fowords, ond lulwes provide fwo-srUed profecfion. lf lhese derivolive inslrumenls ore
used in o hedging reloiionship, lhey hedge ogoinst both increqses ond decreoses in prices or
roles. An option provides one-sided hedging: prolection ogoinst unfovorqble movemenls in
prices or roles wilhoul ioking owoy ihe obility of lhe firm lo profit from o fovoroble movemenl in
prices or rotes. Becouse of lhe one-sided noture of on oplion, on oplion hds volue ol the
ogreement dole ond lhe buyer ot the option must poy lhis omount ol the beginning of the
conlroct period.
Ihe Nolionql Amounl
ln order to fully underslond derivolive. one musl know the number of unils (quontityt thot is
specified in lhe derivotive inslrument. This is colled the nolionol amount, ond il determines the
lolol peso volue of o denVqfive, lroceoble lo mavement or chonges in the vnderlying. ln olher
words, it is lhe lotol ioce omounl of lhe osset or liobility thol underlies lhe derivolive conlrocl.
The nolionol omaunt of o derivolive is lhe number of cunency unib, number of shorer, nvmber
of bushels of commodily, pounds, or other- unils specifed In the frnonciol instrumenl, il msy alto
reler lo pdncipal omounl of debL

The notionol omounl con be misleoding becouse the vslue of o derivolive is o lunction of
chonges in prices or inleresl rciles ond is normolly equol lo iusl ,q smqll froction of lhe nolionol
omounl of the underlying ossel.
For exomple. o fonrrord controct hqs o nolionol omounl of P25,000 (30,OOO foreign cunency units
/ 120foreign currency unil per pesol bul hos o foir volue of P0 on lhe doy lhe lonrrord ogreemenl
is signed. ln summory, nolionol omounls grossly overslote/underslote bolh lhe foir volueond tlie
polentiol cosh flows of the derivotives.
642 Chapter I2

H6dge Accounling Summory of Accounting for Foreign Exchonge Goins ond

Effectiveness

Purpose of lhe
Forelgn Hedge
Exchonge Type of Accounling Accounling Accounling
Derivolives Hedge Applies Treolment Resull

To hedge o "undesignoled No Recognize im- Concurrent

foreign Hedge" mediotely in P & recognition in P
exchonge L (some treot- &1.
receivoble_ or ment for foreign
foreign exchonge goin
exchonge or loss on
poyoble hedged item)

To hedge o firm Foirvolue hedge Yes Recognize im- Concurrent

comrritrnenl medioletyin P & recognition in P
L (some treot- &1.
menlforforeign
exchonge goin
or loss on
hedged item)

To hedge o Coshflowhedge Yes To the extenl. Concurrenl

forecosted lhe hedge ls ef- recognition in P
foreign fective, recog- &Lono
tronsoction nized os OCI deloyed bosis.

The ineffeclive
portion of the
goin or loss will
be reported im-
medioielyin P &
L.

To hedge on Net lnvestmenl Yes Recognized in Concurrent

investmenl in o. Hedge OCl. Remove recognitionono
subsidiory ond recognize deloyed bosis.
inP&Lupondis-
posol of lhe in-
vestment.

To speculote Not opplicoble No Recognizeimme- Recognilion in

diolelyinP&1. P & L cunently.

OCI - Other Comprehensive lncome.

Derivatiues as Hedging Insffuments in Managing Foreign currenc, Exposures 643

Gomporison: Foir Volue Hedge versus Cosh Flow Hedge

Foir Vqlue Hedge Cosh Fl6w Hedge

Hedging lnstrument (Forword On bolonce sheet On bolonce sheet
Conkoct) corried oi FAIR VALUE conied ot FA|R VALUE

Goin or loss on HEDGING Recognized immediotelY To the extent, lhe

INSTRUMENT inP&L hedge is effeclive,
recognized in OCI

The ineffective Portion

of ihe goin or loss will
be rePorted
immediotelyinP&L

Goin or loss on the HEDGED Recognized immediotelY Not opplicoble -

ITEM due to hedged risk inP&L forecosted lronsoclions'
ore notrecognized

Goin or loss in OCI section is No opplicoble lfthe item hed$ed is o

tronsferredtoP&L forecostedpurchosdof
inventory, the goins ond
losses on the,hedgewill
be reclossified into
eornings when
inveniory is sold, or
when o forecosted
purchose of
equipment. the goins
ondlossesonthehedge
will be reclossified into
os
ecrrnings the
equipment is
deprecioted
Notes to lhe Exominees:

l. ln the 2007 ediljon of this book, the apptication of the',gross" or brood,' monner of
recording foreign currency forword confrocfs were presenfed. ,f besf conveys lhe
concepl ol counlerbqlancing gornr ond losses. Under fhrs opprooch qmounls recorded
of the inception of the contract reflecfed the controctuot obtigations of bofh porties o
gross or brood mqnner of recording. Although this opprooch hos yolue for Inslrvclional
-
purposes, il is not used in proclice.

lnsfeod, componies moke no jovrnal enlry of lhe inceplion of qhe conlrocL Af eoch
rubseguenl repoding dofe, odjusfmenls ore mqde |o reflecl any cfiqnge in the torwsrd
rote. Ihis method rs known os fhe Nel poslfion Accounllng.

To volue whof is being used in proctice, oll solulions presenled in this chopf er were
bqsed on lhe 'hef posifion" opprooch in order lo oppreciole ond reconcile il vilh sctuqt
praclice.

The outhor firmly believes fhot in manoging cammodi|y exposures (wherein no foreign
currency were involved) fhere is no distinction befween the ,,gross" or,,nef' approach in
recording hedging inslrurnents. ,t shou/d be noted thof fhis topic on commodily hedging
hod been removed in fhe revised sy//obus effecfive Ocfober 2}lg CpA Examinolion.

2. Problems were presenf ed without ond withpresenf yolue foclors to better understond
discounlrng or the time volue of money in hecrging fronsoclions.
Derivalives in Hedging Foreign Currency Exchange Rii;lis 64 5

Fonrord Controcts

Hedging on Exposed tiobility- No Premium or Discounl ("Undesignoted Hedges"

or Hedge does not require Hedge Accounling)

llems I qnd 2 ore bosed on lhe following informotion:

On October 17,2011, Shirley lreneo Co. purchosed from o Thoilond firm on

inventory costing 10.000 boht. Poyment is due on Jonuory 15,2012. Also on
Octobei 17, Shirley lreneo Co. entered into o foreign exchonge forword to buy
10,000 bohl.on Jonuory 15,2012.

toil7ltt t2l3t/tt t/1s/12

Spot rote(boht) P1.30 P1.42 P1.40
Forword rote {boht) 1.30 1.42 l '40

I . The December 3l , 201 I profit ond loss stoiement, foreign exchonge goin
or loss due to hedged item omounted to:

o. P 200 goin c. P1,200 goin

b. 1,000 loss d' 1,200 loss

2. The December 3i , 201 I profit ond loss stotement, foreign exchonge goin or
loss due to hedging instrumentforword controct:

o. P200 goin c. P1,200 goin

b. 1,000 loss d. 1,200 loss.

Hedging on Exposed tiobility - With Premium Added ("Undesignoled Hedges"

or Hedge does nol require Hedge Accounlirig)

llems 3 through 6 ore bosed on the following informotion:

On October 17,2011, Aljon Lee, lnc. purchosed from o Thoilond firm on inventory
costing 10,000 boht. Poyment is due on Jonuory 15,201.2. Also on October 17,
Aljon Lee,lnc. entered into o foreign exchonge forword 1o buy 10,000 boht on
Jonuory 15,2012.

r0/t7nt t2l3utI tltSlt2

Spotrote (boht) P1.30 P1.42 P1.40
Forword rote (boht) .......;.............. L36 1.43 1.40
646 Chaprcr t2

3. Whol qmounl will Aljon Lee disclose os the foir volue of the forword conirocl
on December3l,20l I ?

o.P0 c. P13,600
b. 7ffi d. 14,300

4. Whot omount will Alj'cn Lee's foir volue of the forword controct on Jonuory
t5,2ot2?

o. P400 c. Pi3,600
b. 7W d. 14.300

5. Whot wos lhe nel impoct on Aljon Lee. lnc.'s income in2O12 os o result of
this hedge?

o. P -0- c. Pl00 increqse in net inCome

b. Pl00 decreose in nei incorne d. P200 increose in net income

llems tl ihrovgh 8 ore bosed on fhe following informalion:

On September 1,2011, Romus Compcrny purchosed mochine poris from Jocky
Chon Compony for 6,000,000 Hong Kong doltors io be poid on Jonuory 1,2012.
The exchonge rote on September 'l is HKg7.7 = Pl. On the some dote, Romus
enters into o fonryord coniroct ond ogrees to purchose HK$6,000,000 on Jonuory
1,2012, ol the rote of HK$7.7 = Pl. On December 31, 2Ql I ond on Jonuory l',
2012, the exchonge rote is HK$B;0 = Pl .

6. Whot is the foir volue of the forwbrd controct on December 3l ,2011?

o.P 0 c. P750,000
b. 29,221 d. 779,221

7. The nominol volue of the forword controct on December 3l ,2011?

o. P -0- c. PZ5O,O00
b. P29,221 d. P779,221 ,

B. Whot is the notionolvolue of the HKg forword controct?

o.P 0 c. P750,000
b. 29,221 d. 779,221
Derivatives as Hedgitg Insrrunteyts in Managing Foreign Curency Exposuref 642

9. Meisner Co. ordered ports costing 100,000 boht for o foreign supplier on
Moy l2 when the spol rote wcs ?.24 per boht. A one-month forword
controct wos signed on thot dote to purchose 100,000 bohts of o forword
rote of P.25 per boht. On June 12, when the ports were received ond
poyment wos mode, the spot rote wo5 P.2B per boht. At whot omount
should inveniory be rePorted?

o.P0 c. P24,2W
b. P28,000 d. P25,000

10. on December l, 201 l, Joseph compony, o Philippine compony. entered

into. o three-month forword controct to purchose 1,000,000 foreign
currencies on Morch 1,2}l2.The following peso per peso exchonge rol6s
opplies:

Forword Rote
Spot Rote {Mor. I,2012)
December 1.201 I P0.o44 ?0"042
December3l,20l1 P0.040 P0.037
Morch 1,2012 P0.038 NiA

Joseph's incrementol borrowing rcie is l2 percent. The present volue foctor

for two monlhs of on onnuol inierest rote of l2 percenf {l percent per
monih) is .9803, Which of the following is included in Joseph's December
31, 201 I bolonce sheet for the forword controct?

o. An osset in the ornouni of P1,960.60.

b. An osset in the omoun'l of P3,921'20.
c. As o liobility in the omount of P6,862.10.
d. As o liobiliiy in the ornount of P4.901.50.

'll. Tcste Bits lnc. purchcsed chocolotes frorn Thoilond for 200,000 bohts or'
December l, 2Ol l. Foyment is due on Jonuory 30, 2012. On December l
20i 1, the compony olso entered into o 60-doy forword controct to
purchose 200,000 bohts. The forword controct is not designoted os o hedge.
The rotes were os follows:

Spot Rqte Forword Rote

December i. 20] I P0,89 P0.90 (60 doys)
December3], 201 I P0.91 P0.93 (30 doys)
Jonuory 30,2012 ?o.92,
648 Chapter l2

The entries on December 3l ,2011, include o:

o. Credit to Foreign Currency Poyoble to Exchonge Broker, P4,OOO.

b. Debit to Foreign Currency Receivoble from Exchonge
Broker,P6,000..
c. Debit to Foreign Currency Receivoble from Exchonge Broker,
Pr 86,000.
d. Debit to Foreign Cunency Tronsoction Goin, P4,000.

12. Using the some informolion in No. I l, the entries on Jonuory 30,2012,
include o:

o. Debit to Pesos Poyoble to Exchonge Broker, P180,000.

b. Credit to Cosh, P184,000.
c. Credit to Premium on Forword Controct, P4,000.
d. Credil to Foreign Currency Receivoble from Exchonge Broker,
Pr80,000.

13. Using lhe some informotion in No. I l, the entries on Jonuory 30.2012, include
o:

o. Credit to Foreign Cunency Units (Bohts), P184,000.

. b. Credit to Cosh, P180,000.
c. Debit to Foreign Currency Tronsoction Loss, P4,000.
d. Debit fo Pesos Poyoble io Exchonge Broker, P184,000.

14. Using the some informotion in No. I I, the entries on Jonuory 30, 2012, inctude
o:

o. Debit to Pesos.Poyoble to Exchonge Broker, P184,000.

b. Credit to Foreign Currency Tronsoction Goin, P4,000.
c. Credit to Foreign Cunency Receivoble from Exchonge Broker,
PI80.000.
d. Debit to Foreign Cunency Units (Bohts), P184,000.
Wilh PresentVolue: Hedging on Exposed Liobility

{ems l5 through 19 ore bosed on fhe following informolion:

Stork, lnc. ploced on order for inventory costing 500,000 foreign cunency (FC)
with o foreign vendor on April l5 when the spdt rote wos I FL = po.os3. sior(
rec^eived the goods on Moy I when the spot role wos I FC = P0.687. Also on Moy
l, stork entered into o 90-doy forword controct to purchose 500,000 FC of o
forword roie of I FC = P0.693. Poyment wos mode to the foreign vendor on
August I when the spot rote wos I FC = Po.696. stork hos o June 30 yeor-end. ln
Derivatiies as Hedging Instruments in Managing Foreign Currency Exposures 649

thoi dole, the spot rote wos I FC = PO.69l, ond the forword rote on the controct
wos I FC = P0.695. Chonges in lhe cunent volue of the forword controct ore
meosured os ihe present volue of the chonges in the forword rotes over time.
The relevont discouni rote is 6%.

15. Ihe foreign exchonge goin or loss on hedging instrument (forword controct)
on June 30 omounted to:
o. P2;@0 c. P995
b. r,000 d. Zero

16. The nominolvolue of the forword controct on June 30 omounted to:

o. P2,000 c. P995
b. Pr,000 d. Zero,

17. The foir volue of the forword controct on June 30 omounted to:
o. P2,000 c. P995
b. Pr,000 d. lero.
18. The net income effect on June 30 omounied to:
o. P2,000 c. Pl,m5
b. 1,000 d. P 995
19. The foreign exchonge goin due to hedging instrument (forword controci)
on August I omounted to:
o. P2,500 c. PI,500
b. 2,000 d. 505
20. Belsen purchosed inventory on December l, 2008. Poyment of 200,000
foreign cunencies wos to be mode in sixiy doys. Also on December l,
Belsen signed o controct to purchose 200,000 foreign currencies in sixty
doys. The spot rote wos Pl = 2.80 FC ond the 60-doy forword rote wos Pl =
2.60 FC. On December 3l , the spot rote wos Pl = 2.90 FC ond the 30-doy
fonarord role wos Pl =2.62 FC. Assume on onnuolinteresi rote of 12%ond
o foir volue hedge. The present volue for one month of 12% is .9901.
ln the journol entry to record the estoblishmenl of o forword exchonge
contrqct, of whot omount should the Forword Conlroct occount be
recorded on December I?

o. P7l,428.57
b. P76,923.08
c. P5,549.51
d. P0, since there is no cost, there is no volue for lhe controct ot
this dote.
Hedging on Exposed Asset-"Undesignoted Hedges" or Hedge does not require
Hedge Accounting

Items 2l through 23 ore bosed on lhe following informotion:

On April 4,2011, Conrodo Uberito Beouty Products delivered to o Pokiston firm

inventory it sold for 100,000 rupees. Poyment is due io be received on August 2,
201 l. The compony's fiscolyeor ends June 30. Also on April 4, Conrodo Uberito
Beouty Products entered inio o foreign exchonge forword to sell 100,000 rupees
on August 2,2OOB.

4/4il1 6/30/It 812/I't

Spot rote (rupee) .. P.80 P.84 ?.82
Forword rote {rupee) ................77 .83 .82

21. Whot wos the net impoct on Conrodo Uberito's income ln 201 I os o result
of this hedge?

o. P -0- c. P2.000 decreose

b. P2.000 increose d. P3,000 increose

22. The foir volue of the forword coniroci on June 30, 201 I ?

o. P -0- c.' P 6,000

b. P4.000 d. P83,000

23. The foir volue of the forword controct on August 2,2Oll?

o. P1,000 c. P82,000
b. P5,000 d. P83,OOO

24. On June l, ComCo received o coniroct to sell inventory for 500,000 yens.
The sole would toke ploce in 90 doys. ComCo immediotely signed o 90-
doy forword coniroct lo sell the yen os soon os they ore received. The spol
rote on June I wos Pl = 240yens ond the 90-doy forword rotewos P\ =234
yens. At whot omount would ComCo record lhe Forword Controct on
June I ?

o.P0 c. P2.l l0
b. P2,083 d. P2,532
25. MNC Corp. (o Philippine-bosed compony) sold ports to o foreign customer
on December l, Zbi t, wittr poymeni of l0 million foreign currencies to be
,e..v.o on Mcrch 31, 2012. The following exchonge rotes opply:
Forword rote
Dotes Spot Rote forSji.!mA_
December 1,201 I P.0035 P.0034 (4 months)
December3l,20l l .0033 .0032 (3 months)
Morch 31,2A12 .0038 N/A

MNC's incremeniolborrowing rote is 12 percent. The present volue foctor

per
ior tnree months of on onnuo'lrote of interest of l2 percent (l percent
month) is 0.9706. I

Assuming thot MNC eniered inio no forword controct, how much fcreign
;;il;6" goin or toss stroutd it report on iis 20]1 income stotement with
regord to this tronsoction?
o. P5,000 goin c. P2,000loss
b. P3,000 goin d. P1,000 loss

26. Using the some informotion in No. 25 ond ossuming th'ot MNC entered
'rt;; torword controct to sell l0 million foreign cuffencies,on December
i, iOi f , os o foir volue hedge of o foreign cunency receivoble, whot is the
n'.f-i*b"ci on itt net income in 20l l1esulting from o fluctuotion in the
volue of the foreign currencies?
o. No imPoct on net income.
b. P5B.B0 decreose in nel income.
c. P2,000 decreose in net income'
d. Pl,941.20 increose in net income.

27. On July 1, 201 l, Cohoon Compony sold some limited edition grt prints to
Si"[u bo*pony for Y4Z,B50;000 to'be poid on Seplember 30 of lhot yeor'
ine iunent 6xchonge roie on July l, 20 1 l, wos Y I I 0=P l, so the lotol poyment
of the current exch6nge role would be equol to P435,000. Cohoon enlered
into o forword contrdci with o lorge bonk to guorontee the number of
p"ioi to-0. received. According toJfre terms of the. controct, if Y47,850,000
ii wofn less thon P435,000, thd bonk will poy cohoon the difference in
iosh. Likewise, if ya7jbi0,000 is worth mord ihon P435,000. Cohoon must
pov fi..'e bonk the difference in cosh. Assu-ming the exchonge rote on
5JpternO"r 30 is Yl05=Pl, whot omount will Cohoon poy to, or receive
from, the bonk (rounded to the neorest peso)?

o. Pl8,9l3 poyment c. P2O,7l4 poYment

b. l8,9l3 receipt' d. 20,714 receiPt
652
Chapter l2

28. on November 1.,2011. cohoon componysold some limited edition ort

prints to Sitokecompony tory47,gso,oob to be poid on Jonrory I,2o12.rhe
current exchonge rote on November l,2o1l. wos yl l0=pl, so ihe totol
poyment ol the cunent exchonge role would be equol to p435,000.
cohoon
entered inlo o forword controctwith o lorge bonk to guorontee tne numOer
of pesos to be received. According to ttre terris of the controci, if
Y42,850,000 is worth less lhon p435,000, the bonk wiil poy cohoon the
difference in cosh. Likewise, if y4z,gs0,0o0 is worlh more thon p43s,000.
Cohoon must poy the bonk the difference in cosh. Assuming tfre excnonge
rote on December 31, 201 I is yl l5=pl, whot omount will Cohoon disclo-se
os the foir volue of the forword controct on December 31, 201I (onswers
rounded to lhe neorest peso)?

o.P0 c. P 2O,714
b. lB,9l3 d. 4t6,087

Hedging.on unrecognized Foreign currency Firm purchose commitment- Hedge

Accounling Applies

Items 29lhrough 38 ore bosed on the following informolion:

on ociobe r 2,2Q1I , Asser Tomoyo, lnc. ordered o custom-built possenger von

from o Joponese firm. The purchose order is nonconcerobre. The
is I ,000,000 yens with delivery ond poyment lo be on Morch 3I
brrcn"ie pri..
,2012.on ociober
2,2011, AsserTomoyo, lnc. entered into o forword controct to buy 1,000,000 yens
on Morch 31,2012 for p.52. on Morch 31, 20l 2, the custom-built'possengervon
wos delivered.

t0/2/t t t2t3t t/t 3l3r lt2

Spot rote (rupee) P.50 P.56 P.57
Forword rote (rupee) .53 .58 .57

Accounled for os Foir Volue Hedge

29. The December 3r ,201r profit ond ross stotement, net foreign exchonge
- goin or loss (forword controct
ond commitment):
o. P10,000 net goin c. Tero
b. 10,000 net loss d. Not opplicoble since hedge
occounting does not opply
Derivatives as Hedging Instru,nents in Managing Foreign Currency Exposures 65 3

30. The Firm Commitment occount bolonce os shown in the December 31,
201I bolonce sheet omounted to:

o. P50,000 osset c. P5O,0O0liobility

b. 60,000 liobility d. None, since it is o foir
volue hedge

31. Whot is the foirvolue of the forword controct on December3l,2}ll?

o. P50,0OO receivoble c. P60,000 receivoble
b. 50,000 PoYoble d. 60,000 PoYoble

32. Whot is the foir volue of lhe forword controct on Morch 31,2012?

o. P5O.O00 receivoble c. P40,000 receivoble

b. 50,000 poyoble d' 40,000 PoYoble

33. The Firm Commitment occount bolonce on Morch 31, 2Ol2 omounted lo:

o, P10,000 osset c. P40,000 osset

b. 50,000 liobility d. 40,000 liobilitv

34. The volue of the equipment on Morch 31, 2012 omounted to:

o. P500,000 c. P560,m0
b. s30,000 d. 570,0m

Accounfied for os Cosh Flow Hedge - PAS No. 39 por. 87

35. The December 3l , 201 I profit ond loss stotement, foreign exchonge goin or
loss on hedged item/commitment omounted to:

a. P50,000 loss c. P50,OOO loss

b. 50,000 goin d. Noi opplicoble, since it is o
cosh flow hedge

36. The December3l,20l1 foreign exchonge goin orloss on the hedging

instrument {forword controct) omounted to:

o. PSO,OOO goin, olhel comprehensive income

b. P50,000 goin, cunent eornings
c.. P60,000 loss, other comprehenslive income
d. P60,000 goin, cunent eorniongs"
 654 ,-r-__,^- ,

37. The Firm commitment occount bolonce omounted on Morch 31, zol2
omounted to:

o. P10,000 ossei c. P40,000liobitity

b. 50,000 liobitify d. None.sinceitisocoshflow hedge
38. The volue of the equijrment on Morch 3l,nl2ossuming thot
tuserTomoyo, lnc.
hos elected lo opply PAS 39 por. 9S (b), ond odjust ihe c6st of non-nnonOorliJms
ocquired:

o. P5m,m0 c. P560,000
b. P530,0m d. P5/0,m0

llems 39 ond 40 ore bosed on the following informolion:

on october l, 201 I , JMI compony ordered some equipment from o supplier for
200,000 boht. Delivery ond poyment is to occur on November30. 201 l.'Tii;;p;i
rotes on October I ond November 30 ore pf .SO onO-pi.Cil

39. lf lhe compony does not hedge lhe commifment. of whot omouni is lhe
equipment recorded on the books on November 30, 201 I ?

o. P300,000 c. P200,000
b. 260,000 d.0
44. lf lhe compony ocquires on october l, 201 I o forword controct fo hedge
ony unfovoroble chonges in fcrir volue of ihe equipment, ot whot o*or].J
i1 tfe equipnnent recorded on the books on'Nivember 30,
20ll.a-T;;
oclober l, 201 I forword rote for November 30 setilement is p1.35.
o. P300,000 c. P260,000
b. 270,0@ d. 200,000

Wilh PresentVolue: Hedging o Firm purchose Commilment

{em.s 4l lhroygh 47 ore bosed on fhe fofiowing informotion:

on.Jonuory I , 20r r, gon Jose, rnc. enters into -on purchose r ,000
wotches for 5,000 foreign currencies {FC) per wotc6, "gr;;;;;ilo
to oe oetiuered on Morch
31,201 l. The controct,meets the requiiement of o firm commltm.nt}",e
poyoble.is r;;;ti;g
lo be setfled on Aprit 30, 20l t. on Februory i, 201 I (fisci
_expected
yeor ends Februory 28)-, son Jose, lnc. decides to neJge the
exposure enters into o forword controct to exchonge
foieign-cr;;;;t
deso for FC 5,ooo,oob o,l
April30, 201 I (ot o forword rote of FC 1.429:P\. The foiivtlo iintrocr
is,resignoteJ
os o hedge of ihe firm commitment to purchose tfre wotcf'.r
qnd to seltle lhe bolonce owing on Afril30,20] on Morch 3l , 201 I
r. Cttu.ii".i.ss wiil be ossessed
bosed on the forword rote. The relevont discount roleis 07".
Derivatives as Hedlging Instruments in Managing Foreign Cilrrency Exposures . 65 5

The following toble summorizes the key doio:

Spot rofe Forward rofe of controct expiring 41301201I

Dote FC per Peso FC per Peso
11112011 r.450
2t112011 1.400 1.429
2t281201 1.400 1.415
a3vnl 1.410 L400
41301201 r.360 1.360

41. Whot wos the net impoct on Son Jose lnc.'s Februory 28,2O1I income
stotement os o result of this foir volue hedge?

o. P37,860increose c. P34,273decreose
b. P34,169 decreose d. P -0-
42. Whot is the foir volge of the firm commitment occount on Februory 28,
2011?

o. ?34,619 liobility c. P34,273 osset

.b. P34,273liobility d. P37,860 osset

43. whotwos the net impoct on son Jose lnc.'s Morch 3i,2Oll income
slotement os o result of this foir volue hedge?

P -0- c. P37,844 increose

P34,273increose d. P72,117 decreose

44. Whot is the foir volue of the forword controcJ on Morch 31, 201 I ?

o. P34,619 c. P37,864
b. P37,844 d. P72,117

45. Whot is the volue of inventory on Morch 31, 201 1 ?

q. P3,676,471 c. P3,546,099
b. P3,571,429 d. P3,473,982

46. Whot is the corrying omouni'of occounts poyoble on April30,201 I?

o. P3,676,471 c. P3,546,O99
b. ?3.571,429 d. P3,473,982
47. What is the foir volue of ihe forword controct on Morch 3l,2o1l?

o. P177,521 c. P 72,117
b. ?130,372 d. ? 34,273

Hedging on unrecognized Foreign currency Firm soles commilmenl - Hedge

Accounling Applies (Foir Volue Hedge)

Items 4S lhrough 52 ore bqsed on the foflowing informotion:

on october 12,2011, George Jomes, lnc. obtoined o nonconceloble soles

order from o Thoilond firm for o custom-mode stotue of her beloved Fotimo.
The controct price wos 100,000 boht. on october 12,201I George Jomes
entered into o foreign exchonge forword to sell l0o,o0o boht in l0b doys ot
the forwqrd rote of P3.15. The itotue wos delivered on December I l, 201 I
ond collection on Jonuory 20,2O12.

toil2lr r t2/n tn t2l3t ln l/2a/r2

Spot rote (boht).......... p3.20 p3.00 p3.09 p2.9t
Fonruord rote (bcht)... 3.lS 2.98 3.08 2.97

48. whqt wos the net impocl on George Jomes, lnc.'s December I l, 2ol I
income os o result of this foir.volue nLdge?

o. P -0- c. Pl7,000increose
b. P17,000 decreose d. P2O.OOOdecreose

4?. Whot ore lhe reportoble soles in the income slotement in 201I ossuming
thot the firm commitment occount be closed io soles occount?

o. P300,000 c. P309,000
b. P308.000 d. P317,0@

50. on December 3l , 201 l, the foreign exchonge goin or loss on ihe occounts
receivoble (AR) ond firm commitment (FC) omounted lo:

AR FC AR FC
o. P9,000loss PO c. P 9,000 goin P9,0@ goin
b. P9,000 goin PO d. P 0 P9,000loss
Derivalives as Hedging listruments in Managing Foreign Currency Exposures 657

5l . On December 3 I , 2Ol1 , the foreign exchonge goin or loss on the hedging

instrument {forword controct) omounted to:

o. P7,000 goin c. P 9,000 goin

b. P7,000loss d. Pl 1,000 loss

52. Whot wos the net impoct on Jonuary 31, 2012 income os o result of this foir
volue hedge?

o. P -0- c. Pl,O00 net goin

b. P2,000 net goin d. P1,000 net loss

53. On Morch l,20ll, Westfields Corp. received on orderforporfs from o

foreign customer of o price of 500,000 foreign currencies with'o delivery
dote of April 30, 201 l. On Mqrch l, whe the peso-foreign cunency spot
roleis P0.l15, Westfields Corp. entered into o two-month forword controct
to sell 5OO,OOO foreign cunencies of o forword rote of P0.12 per foreign
curency. lt designotes the forword controct qs o foir volue hedge of the
firm cornmitment lo receive foreign currencies, ond lhe foir vdlue of lhe
firm commitment is meosured by refenring to chonges in lhe peso forword
rote. Westfields delivers the ports ond receives poyment on npril 30, 20l l,
when the foreign currency roie is P0.l18. On Morch 3il,20l l, the foreign
currency spol rote is P0.123, ond the forword controct hos o foir volue of
Pl,25o.

Whot is the net impoct on Westfields net income for lhe quorter ended
Morch 31,2011, os o result of the forword conlroct hedge of o firm
commitment?

o. P-G
b. P1,250 increose in net income
c. P1,500 decreose in nei income
d. P1,500 increose in net income

54. Using the some informotion in No.53, whot is the nel impoct on Westfields
net income for the quorter ended June 30, 201 l, os o result of the fonarord
controct hedge of o firm commitment?

o. P -0-
b. P59,000 increose innet income
(-. P60,000 increose in net income
d. P61,500 increose in net income
658 Chapter I2

55. Using the some intormolion ln No. 53, whot is lhe net increose or decreose
in cosh flow from hoving entered inlo this forword conlroct hedge?

o. P -O-
b. Pl,O0O increose in cosh flow
c. P1,500 decreose ln cosh flow
d. P2,500 increose in cosh flow

Hedging o Forecosted Tronsoction - Hedge Accounting Applies

Items 56 through 58 ore bosed on lhe following informotion:

On December l,20ll, o Philippine firm, Cris Espenillo, lnc. eslimotes lhot ot

leost 5,000 units of invenlorywill be purchosed from o compony in Toiwon during
Jonuory of 2012 for 500,000 Nt dollors. The lronsoction is proboble, ond it is lo be
denominoled in Nt dollor. Soles of the inventory ore expected lo occur in the six
months following the purchose.

The compony eniers into o forword conlroct io purchose 500.000 Nt dollors on

Jonuory 3l , 2012 for P I .01 .

Spot rotes cind forword rotes of the Jonuory 31, 2012, settlement were os follows
{pesos per Nt dollor}:
Foword Rote for
Spof Rote I l3l ll2

December 1.201 I Pl.03 Pl.0l

December3l,20l l r.00 .99
Jonuory3l ,2012 .98

56.The Decernber 31, 2008; foreign exchonge loss on hedging instrument

(forword controct) omounted to:

o. P30,000, other comprehensive income

b. P30,000, cuneni eornings
c. Pl0,O0O, cunenl eorninls
d. P10,000, olher comprehensive income

57. On Jonuory 31, 2012, foreign exchonge goin or loss on hedging inslrument
(forword controct) omounted lo:

o. P15,000 debit, other comprehensive income

b. P10,000 debit, other comprehensive'income
c. P 5,000 debit, other comprehensive income
d. P15,000 credit, current eornings
Derivatives as Hedging Instraments i, Monogilg For"ign Cu,'u!'y E*

58. Suppose thot in Februory. the inventory sold for P600,000, whot would be
the'gross profii ossuming ony odjustments {if ony} regording exchonge
diffeientiolwill be thru Cost of Goods Sold occount:
o. P110,000 c. P95,000
b. P105.000 d. P90,000

Wifh Presenf Volue: tledging o ForecosfedlAnlicipafed Soles

lfems 59 lhrough 62 arebosed on fhe foliowinginformotion:

Son Antonio, lnc. ond its subsidiory DJ Compony both uses the peso.os their
tunciionot currency. Son Anlonio wonts to limit the effect of cunency fluctuotions
initig.rp occounts in the next quarter, byhedging forecosied foreigrn curency
liCjA;#;noted sotes by DJ Cbmpony. ISon Antonio expects DJ Compony to
i*rr FC 13,500;000 of goods on June 30, 201 {fiscol yeor ends Morch 9l}rtlg:f:l:
tn lonrorv il, 201 l, it enters into o six-month iorword conirggt s9t! rQ 13,500,000
onO receiv e P9 6,429 on June 30, 201 1 (ot o forword rote of I FC: P I 40). Since Son
nnt""io ond DJ compony both hcrve the some functionolcurency, Son Antonio
itp"r;nltGO to hedgi ihe subsidiory's exposure. The relevont discount rote is 6%.
The following ioble summorizes the key dolo:
Spol rote Forword Rote for
Dole of indicoted dote 6130120t t

11112011 Pl : FC i35 Pl : FC 140

a3112411 Pl : FC 140 PI : FC 142
61fi12011 Pl : FC 144 Pl : FC 144

59. Wfrot wos ihe net impoct on Son i\ntonio, lnc"'s Morch 3l , 201 I income os
o result of this cosh flow hedge?
o. P -0- c. P1,339 goin
b. PI,339 loss d. Pi,359 goin

60. whot is the foir volue of the forword controct on Morch 31, 201 I ?

o" Pl,339 c. P3,5lB

b. Pl.359 d. P3,571

61. Whot is ihe foreign exchonge gjoin or loss due to hedging instrumenl on
June 30, 2O11?

o. P1,340, current eornings c. P2,679, cuneht eornings

b. P1,340, OCI d. P2,679, OCt
62. whot is the reporloble soles omount on June 30,201I ossuming lhot ony
exchonge differentiolwill be thru lhe Soles occount.

o. P96,750 c. P95,Q7O
b. P96,429 d. P93,750

w ilh Pr e s e nt v sl u e : He d gi ng a n Av ailable -for-sofe - Eq u tly lnyesfmenfs

lfems 63 through 67 are bosed on fhe foilowing informolion:

Jennifer Compony ocquires 100,000 shores of New York Jewellers for FC I .00 per
shore on Jonuory l, 201 l, ond clossifies the inveslment os on ovoiloble-for-sole
finonciol osset. New York Jewellers is listed on the New York Stock Exchonge only
ond oll tronsoclions in the compony ore denominoted in lhe foreign cunency
unit. The funclionol cunency of Jennifer Compony is the peso. Jennifer Compony
decides to hedge the risk of cunency fluctuolions on this ovoiloblejor-sole ossets
over the next six months ond enters into o forword controct to sell FC I00,0@ on
June 30, 20 I l, of on exchonge rote of FC .62per peso (p I .6 I 3 : FC I ). The relevont
discount role is 6%.

The following toble summorizes the key doto:

Forword Role of controct

Dofe rFcl r3?'J#:'r"
shorePn'ce 6 I 30 / 20Jl {FC per peso)
expinng
1l1l201r L00 .60 .62
3l31l0| 1.50 .65 .66
613A12011 2.00 J0 .70

63. whot is the goin or loss on ovoiloble-for-sole security on Morch 31, 201 I ?
o. P76,923 goin c. P64,102 loss
b. 64,102 goin d. 3,193 goin

64. whot is the net foreign exchonge goin orloss on foreign currency on Morch
31,2011?

o. P54.102 goin c. P9,628 goin

b. 12,821 loss d. 3,193 goin

65. whot is the goin or loss on ovoiloble-for-sole security on June 30, 2ol I?

o. P 2,184 goin c. P54,945 gorn

b. 54,945 loss d. 71,4n goln
Derivatives as Hedging Instrurllents in Managing Foreign Currency Expdsures 66 I

66. Whot is ihe net foreign exchonge goin or loss on foreign currency on June
30,201 I ?

o. P 2,184 goin c P54,945 goin

b. 54,945 loss d. 71,429 goin

57. Whot is the foir volue of the forword controct on June 30, 201 1?

o. P 2,184 c- P54,945
b. 18,433 d. 71,429

Speculotion - Hedge Accounling is Noi Applicoble

Items 68 qnd 69 ore bosed on lhe following informolion:

On November l, Creomline Doiry Corp. concluded thot the Thoilond boht

'1,
201
would weoken during the next six monlhs becouse of the coup thoi tronspired
recen1y. ln hopes of reporting o goin, Creomline entered into o foreign exchonge
forword for specuoltion on November l, 201 l, to sell 1,000,000 bohl on April 30,
2O12al the forword roie.
1t /t l2ot t t2/31 lt t 4l30lt2
Spot rote(boht) Pl.l9O Pl-180 Pl '2lO
Forword rote (boht) 1.199 1.187 1.210

68. The December 3T, 201 I profit ond loss siotement, foreign exchonge goin or
loss on forword controct omounled lo:

o. Pl0,@0 goin c' P12,000 goin

b. 10,000 loss d. 12,000 loss

69. On April 30,20^12, foreign exchohge goins or loss on forword controct

omounted to (ignoring ony discount reversol)

o. P23,000 loss c. P30,000 loss

b. 23,000 goin d. 30,000 goin

Items 70 ond 7l ore bosed on lhe following informqlion:

On December l,20ll, Albert Compony enters into o forword controct for
speculotive purposes to ocquire lO0,O00 Mexicon New Peso on Morch 1,2O12,o
currency in which the compony hos no receivobles, poyobles or commilmenis.
The firm's fiscolyeor-ends on December3l.
662 Chaote, t z

Following ore the spot rotes ond forword rotes t vorious dotes:

t t2/t /20t t 3/r /t2

t2/st /t
Spot rotd (New Peso) pr35 prAO p%,
Forword rote (New Peso) ......... 2.36 2.37 2.42
70. The December 3l , 201 I profit ond loss stotement, foreign exchonge goin or
loss on forwsrd controcl omouni.ed to:
o. P1,000 loss c. P5,000 goin
b. 1,000 goin d. 5,000 tbss
71. on Morch 1,2012 foreign exchonge goins orloss on forword controct
omounted to:
o. P5,000loss c. p2,000 goin
b. 5,000 goin d. 2,000 tbss
72. onSeptember l, 201 l, Brodycorp. entered into o foreign exchonge controct
for speculolive purposes by purchosing 50,000 deutsche morksJor delivery
in 60 doys. The rotes io exchonge follow:

Spot rote ....................

30-doy forword rote ............ 20.98 20.00
60-dqy forword roie .................!r...........i.......;r ZO.9g 22.10

ln its September 30, 201 l, income sfotemeni, whot omount should Brody
report os foreign exchonge transociion goin (loss).

o. P{49,000) . _ c. P27,5@
b. 55,500 d. (49,500)
(AtCpA Modified)
Combinotion of Fonryord Controcts
Items 73 through 76 ore bosed on lhe following informolion:

on Decem ber 12,20-l l , !-mp co. entered into three foword exchonge controct,
eoch to purchose 100,000 foreign cunencies (FC) is 90 doys. The relevoit exchonge
roles ore os follows:

Forward Rote
Spol Rote (for Morch t2,2012)
November30,20l P.B7 P.89
December 12,2A1 .BB .90
December3l,20l 92 .93
 )

Dbrivatives as Hedging InstrumentS in Managing Foreign Currency Exposures 663

73. lmp entered in,to the firstforword controct to hedge o purchose of inventory
in November 201 l, poyoble in Morch 2012. At December 3l . 201 l, whot
omount of foreign currency tronsoction goin from his forword controcl
should lmp inClude or net income?

o.P0 c. P 5,000
b. 3,000 d. ro,m
(ArcPA)

74. Ai December 3l, 201 1, whot omounf of foreign currency tronsoCtion loss
should lmp include in income from the revoluoiion of the oicounts Poyoble
of 100,000 foreign cunencies (FCs) incurred os o result of ihe purchose'of
inventory ot November 30, 201 l, poyoble in2O12?

o.P0 c. P4,000
b. 3.000 d. 5,000
' (AlcPA)

75. lmp entered into the second forword controct to hedge o commitment to
purchose equipment beinj monufoctured to lmp's specificolions. The
expecied delivery dote is Morch 20i I ot which lime settlement is due to
the monufocturer. The hedge quolifies os o foirvolue hedge. At Decernber
3l,20l l, whoi omount of foreign cunency tronsoction goin from this forword
controct should lmp include in net income?

o.P 0 c. P 5,000
b. 3,000 d. 10,000
(AlcjP,\)

76. lmp entered inio the third fotword controct for speculotion. At December
3l.20l l, whot omount of foreign cunency tronsoclion goin from this forword
controct should lmp include in net income?

o.P0 c. P 5,000
b. 3,000 d. 10,000
(ArcPr.)
664 Chapter I2

Hedging of o Net Investment in Foreign Entity using o Dervofive lnslrument -

Hedge Accounting Applies

llems 77 ond 78 ore bosed on lhe following informolion:

On December 3 l, 2Ol l,lndoy Compony, the porent of ihe I 00% owned Joponese
subsidiory expected the yen to weoken by the end of 2012. Accordingly, lndoy
Compony, the porent controcted with o foreign exchonge troder on December
31, 201 l, to selt 2,300.000 yens (the subsidiory's nef osset posiiion ol thot doie) in
365 doys of ihe forword rote of P.435. The following direct exchonge rotes ore os
follows:

t2l3t /201t t2/3t /t2

ffheincepfion fthe expirofrbn dofe ond
date) finonciol reporting dol e)
Spot rote P.440 P.400
Forword rote (selling forword) ... .435 .400

The Jonuory 1,2012 bolonce of the tronslotion reserye {cumulotive) - debit

omounted to P I 29,000 ond tronslotion reserve loss for 2012 of P 100,000.

77. The December 3l ,2}lzforeign exchonge goin or loss on forvyord controct

to be ihorged lo omounted to:

o. P80,500 goin - OCI c. P80,500 loss - OCI

b. 80,500 goin - eornings d. 92,W goin - OCI
78. The December3l ,2}12,tronslotion reserye bolonce (cumulotive tronslotion
odjustment) omounted to:

o. P148,500 debit c. P309,500 debit

b. 229.500 debil d. 148,500 credit

llems T9lhrough 82 ore bosed on the following informotion:

Dudongski lnc. uses the closing rote method inet investment meihod or cunent
rote method os required by PAS 2l wherein the functionol cunency is not lhe
cunencyof o hyperinflotionoryeconomylof tronslotionforits 1OO%-ownedforeign
subsidiory,.Dong Suzuki (creoted in 2011). For 2012, Dong Suzuki's net income
wos 100,@0 LCU (locol cunency unit, the yens), which tronsloted into P33,000.
(Eornings occuned evenly throughoul the yeor ond were remitted to Dudongski
!nc. monthly).An unfovoroble tronslotion reserve/odjustment of P64,000 resulted
for 2012. At December 31, 201l, lhe Cumulotive tronslotion reserve occount
hod o credit bolonce of Pl8,000
Derivatives as Hedging Inshunrents in Managing Foreign Currency Exposures 665

On December 31, 20l l, in expectolion thot the LCU (lhe yens) would weoken
ihroughout 2012,the mcinogement entered into o one-yeorforword exchonge
conlrocis to selt 600,000 LCU (Dong Suzuki's net osset position of December 31,
201 I ) on December 31, 2012 ot the forword rote of P.40 {No hedging wos done
in 2Ol I ). The following direct exchonge rotes ore ossured:

t2lst /20t t 6/30/t2

(theinception(ofinonciol l2l3ll20l2
doteJ rW Fvpirotiondote)
Spot rote ......:......... P.42 P.37 P.30
Forword rote (selling forword) .4O .36 .30

79. The Jurre 30,2012 foreign exchonge goin or loss on forword controct
omounted to:

o. P24,W goin - eornings c. P3O,OOO goin - OCI

b. 24,W goin - OCI d. 24,W loss - OCI

80. The June 30, 2012, tronslotion reserve bolonce (cumulotive tronslotion
odjustment) omounted to:

o. P22,W debii bolonce c. P42,Offi credit bolonce

b. 22,0n cerditbolonce d. 24,W creditbolonce
8l . The December 31, 2012 foreign exchonge goin or loss on forword controct
omounted to:
, o. P36,OO0 goin - eornings c. P36,OOO goin - OCI
b. 42,W goin - OCt d. 36,000 loss - OCI

82. The December3l ,2ll2,tronslotion reserye bolonce (cumulotive tronslotion

odjustment) omounted to:

o. ?22,W debitbolonce c. P14,000 creditbolonce

b. 36.000 creditbolonce d. 14;000 debitbolonce
666 Chapter l2

Hedging of o Net lnvestment in Foreign Entity using o Nonderivofiye lnsfrumenf

Hedge Accounting Applies

llems 33lhrough 87 qre bosed on the following informotion:

On Jonuory l, 20l l, lndoy Goruloy Products, nc. decide to hedge the portion of
its investment thot it just mode in lndion compony thot is reloTed to lhe book
volue of lndion Compony's net ossets. lndoy is unsure wheiher the direct exchonge
rote for lndion rupees will increose, or decreqse for the yeor ond wishes to hedge
its net osset investment. On Jonuory 1,2011, lndoy's 100% ownership shore of
lndion Compony's net ossets is equol to 50,000,00b rupees (40,000,000 rupees
copitolstock plus 10.000,000 rupees retoined eornings). lndoy bonowed 50,000,000
rupees, of o 5% rote of interest to hedge ils invesirnent in lndiqn Compony, ond
ihe principolond interest ore due ond poyoble on Jqnuory 1,2012. A fovoroble
ironslotion reserve/odjustment of P950,000 resulted for 201 l. At December 31,
2010, the cumulotive tronslolion reserve occouni hod o credit bolonce of
Pr 1.000.000.

The relevont direct spol exchonges (Peso/Rupee) ore:

Dole Role
Jonuory 1,201 I P1.20
October 1,201 I 1.36
December3l,20i I 1.40
201I overoge i.30

83. The December3l,20l I Loons poyoble occouni bolonce obtoined to hedge

the net investmeni omounted to
o. P60,000,000 c. P68,000,000
b. 65,000,000 d. 70,000,000

84. The December 31, 201 I the foreign exchonge goin or loss due to hedge of
its net investment

' o. P20,000,000 loss - OCt c. P10,000,000 goin - OCt

b. 10,000,000 loss - OCI d. 10,000,000 goin - eornings
85. The December 31, 201 I :

/nteresf Expense /nteresf Poyoble

o. P3,500,000 P3,500,000
b. 3.250,000 3,500,000
c. 3,250,000 3,250,000
d. 0 0
Derivatives as Hedging Instruments in Managing Foreign Currency Exposures 667

86. The December 31, 201 I foreign exchonge goin or loss tt'oceoble to hedge
ineffecliveness omounted to:

o.P0 c. P250,000 loss - current eornings

b. 250,000 goin - cunenl d. 250.000 loss - OCI
eornings

g7 . The December 3l,2Ail,ironslotion reserve bolonce (cumulotive tronslotion

odjustment) omounted to:

o. P,|,950,000 credit bolonce c. P950.000 credit bolonce

b. 1,950,000 debitbolonce d. 950.000 debit bolonce

liems SS lhrough 90 ore bosed on lhe following informotion:

Noiing thot ihere wos o P5,780,000 tronslotion odjusiment goil, Doro lnc'. (lhe
p"t.nj compony) secured o foreign bonk loon denominoted in the functionol
currency when the spot roie wos iToiwon Nt dollor = Pl .O22.The bonk loon hos
o Jrincipol omount bt ZOO,OOO,O00 Nt dollors. lnterest colculolions ore ignored.
itr! O"ritl"on is designoted os o hedge of net investmeni ond is qonsidered to
hove sotisfieci oll necessory criterio'

Selecied exchonge rotes between the functionolcurrency (Nt dollor) ond ihe
peso ore os follows:

Doie Rofe
Jonuoryl,20ll P '98
October 1,2012 .. l '00
December3l,20l 2 ...........'...-- 1.05
20.l2 overoge ....".....'........:........'..... 1 .03

88. The December3l,20l2 Loons poyoble occount bolonce obtoined to hedge

the net investment omounied to
o. P196,000.000 c. P206,000,000
b. 200,000,000 d. 210.000,000

89. The December3l,2}l2the foreign exchonge goin or loss due to hedge of

its net investment:

o. P5,600,000 loss - OCI c. P 5,600,000 goin'OCI

b. 5,600.000 loss eornings dr 14.000,000 loss - OCI
 90. The December3l ,2Al2,tronslotion reserve bolonce (cr.rmulotive tronslotion
odjustment) omounted to:

o. P180,000 creditbolonce c. P5,600.000 debit botonce

b. 180,000 debitbotonce d. None
Option Controcls

Hedging. on Exposed Liobiliiy - "undesignoled Hedges,, or Hedge does nol

require Hedge Accounling
llems 9l lhrough g7 qre bosed on lhe following informotion:

on November l, 20.1l, coltex philippines look delivery from o Thoilond firm of

inveniory c_osting 100,0001ccht. poyment is due on .lonu6ry 50, zor i. cun.r"3iitri,
p900 cosh to ocquire o 9O-doy'coil
9oltex Philippines poid option for lo0,o0d
Thoilond boht.

t t lt /20t t t2/3r /20r r t /30/20t2

Spot rote (morket price) pt.2O Pl.22 Pl.23
......... l.2O
Strike price (exercise price) 1.20 1.20
Foir volue of coll option pgOO P2,200 P3,000
91. Whot is the notionol qmount?
o. P 900 c. P 3,000
b. 2,200 d. 100.000 boht
92. whot is the intrinsic volue {lv} ond lime volue (TV) of option on December
31, 201 I ?

lnfrinsr'b Volue TimeValue lntrinsicVolue TimeValue

o. P2,000 p200 c. P2m P2,000
b. 2,M o d. 0 2,2@
Splff Accounfthg venus Non-splif Accounfing

PAI 31, por..7.! slotes lhol 'there is normollyo sing/e foir volue for
o hedging
entirely, ond the foctors.thot.couse chong es in foYtr uorre ore LoliJpena6nri instrument in its
reiotionship is de.:ignofed bv. on entity-for o hedgrng initru^eiTii lrrri,-" rr.os,i|
erceplions permilted or9: @),seporotingjhe intriisic-v"tiio'ia ti^e volue entireiv. ii}_]oiiv
its
con.troct ond desrgnofing os rr9 of on option
oplion ond excludinQ chonge in !9ogin{
instrument onty-tii.nong; in intrinsic votue of on
its tlmi volue*: ola g)
permitted becouse the infrinsic volue of thte option'onoseloroffiL. rhese exceptions ore
... con"g; nerolry be meosured
separotety. A dynamic,hedging strotegy rrot ossesseJ bofi ;;; iniriiiiE,'ra,Je;;;;;;
vatue of on option controct coi quotify-tor h;dg;-;;;;uiiin.::'' ""
'olso known os splff accounling
As stoled previously, pAS 39 requires oll derivotives fo be volued at their fqir volve (ot eoch
finonciol reporling dole). Thus, both the lime volue ond the intrinsic volue element ore vqlue ot
fqir volue. pAS 39 does .not require seporote disclosure of eilher lhe time volue element's foir
volue or the intrinsic volue element's foir volue. ln proctice, the foir volue of loreign curency
exchonge options olwoys ore determinoble in tolol - not by trying to determine ihe foir volue of
eoch foreign curency exchonge option's two elements ond then summing together ihose two
elements. Accordingly, the need lo deiermine the breokdown of lhe tolol foir volue occurs
only
if sptil occounfing ii used. Splr'f ococunfing refers to occounting for lhe time volue elemenl
seporotely from the intrinsic volue element.

For "undersignofecf' fiedges wherein no speciol hedge occounting is used

(becouse lhey ore
neither o fo:rr volue fred6e or o cclsh flow hedge) seporoting lhe chonges in lime volue ond
goins ond losses
inirinsic volue is nof on isire oi oll (such os Nos. 85 to 90), lhe foreign exchonge
on bolh the fime volue elemenl ond the inlrinsic volue elemenl must be reported lhe some woy
eornings For bolh lair volue hedges ond cosh flow hedges, however' PAS 39 ollows
- in currently.
lhe entity
the elements to be reported eiiher the some woy or differently - oll depending on how
ossesses hedge effecliveness.

As qn ollernole mefhod of ossessing hedge effeclivdness -

excluding lhe lirne votue e,etnent
pAS No. 39 permils (bul does not require) on entity to exclude oll or port of o derivotive's firne
volue elernent in ossessing hedge efieciiveness. Thus, sptif accounling occounling for lhe
lirne
volue element in o seporote monner from the inlnnsic volue element| is permitted.

(Note: Sp&:t Aecovnling is used for Nos. 93 ond 94 since if exclude lhe lime volue e'ement in
issesring hedge effeciiveness or onty lhe intrinsic volue is fo be used to meosure effecfiveness)

93. The foreign exchonge goin or loss on option controct (hedging instrum-ent)
due fo chonge inlilnelalue on December3l. 20ll tr chsngesin fhe timg
volue will be excluded from the ossessment of hedge effectiveness should
be:

o. P 7@ loss c. P1,300 goin

b. 2,000 loss d. 2,000 goin

g4. The foreignexchonge goin or loss on option controci (hedging inskument)

due fo chonge in infAnsic yorue on Decernber 31, 20ll tr chonges in fhe
fimi volue w;1, be excruded from the dssessrnenf of hedge effectfveness
should be:

o. P700 loss c. Pl,300 goin

b. 700 goin d. 2,000 goin
(Nofe: Nonsplif ciccounting is used for No. 95 since il include fhe lime vdlue
elemenf in ossessing hedge effecfiveness
ry

95. The foreign exchonge goin or loss on option controct

{hedging inslrument)
on Decemb er 31, 201I if changes in lhe time value witt'be iictided from
ossessment of hedge effectiveness should be:
thi
o. P700 loss c. P1,300 goin
b. 700 goin d. 2,000 goin
Nofe: Splif occountrng will be of relevance when cash f low hedge occo
unfrng is
in eff ect, srnce fhe chongre in intrinsic volue wilt be an equify
intime volue lo cunenf eoqlhgs lJntikeforundesllgnofJf,.ages orin
o..J-t ;;6;
"nJfairvolue
hedges (firm commitment) wherein chonges ore 6olh reflect6d in 1.1u
occount. "li"inCI
96. The December3l,20l I nel foreign exchonge goin orloss omounted lo:
o. P2,000 net loss c. PZ@ net loss
b. 1,300 net goin d. 700 net goin
97 - The Jonuory 31, 2012 net foreign exchonge goin or loss omounted
to:
o. P1,000 net loss c. P200 net loss
b. 800 net goin d. 200 net goin
Hedging on Exposed Asset-"undesignoted Hedges" or Hedge does nol require
Hedge Accounling

Items g8lhrough 102 ore bqsed on the following informotion:

on December 16, 201 l, Gumomelo conroding sold flowers to o Venezuelon

firm. Poyment of 1,000,000 Venezuelon Bolivd is due on Februorv ll,
zoiz.
Concunently, Gumom.ero conroding paid pL,ooocosh fooc quire aZo.a"v-pri
option for 1,000,000 Venezuelon Bolivor. Conrocling follows colendor Oosii
to
reporting.

t2/r6/20r t r2/3t /20t r 2it412or2

Spot rote {morket price) ......... p.l6 P.l5 P.147
Strike price (exercise price) ..... .16
Foir volue of coll option.......... p4,000
.16 .i6
P13.300 P13,000
98. Whot is the notionol omount?
o. P 4.000 c. P 13,300
b. 13,000 d. 1,000,000 botivor
 D"ryt:tr"t H"dg
"t

99. Whot is the intrinsic volue {lV) ond time volue (TV) of option on December
31,201 I ?

lnlrinsic fimeValue
Volue lnfrinsic Value TimeValue
i o. P13,000 P 0 c. Plg,qry P 3,300
b. 0 13,0m d. 3,300 10,000

(Nofe: Splif Accou nting is used for Nos. 100 ond l0l since il exclude the tr'me
volue elbmenf ln ossesiing hedge effecfiveness oronlyfhe i,nfrfnsic volue is fo be
used lo rneosure effecfiveness)

100. The foreign exChonge goin or loss on option controct{hedging instrum.ent)

due fo clonge in time value on December 3t, 20ll tr chonges irn lhe fime
volue Wll be excluded from the ossessment of hedge effectiveness should be:

o.P 10,000 goin c. P700 loss 1

b. 9,300 goin d. 700 goin

'101. controct (hedging instrumentJ
The foreign exchonge goin or loss on option
due fo c:honge in iilriisic volue on December 31, 201I lf cholge; fn fhe
fr'me vqlue win be excluded from the qssessrnenf of hedge effecfiveness
should be:

o. P10,O0O goin c. P9,300 gcin

b. 10,000 loss d. 700 loss
(
i (Nofe: Nonsplif occounflhg is used for No. 102 slnce if a'ncfude ffie fime votue
i
il elemenf in ossessing hedge effecfiveness)
t:

t 102. The foreign exchonge goin or loss on cption conlroct (hedging instrument)
$l
on Decemb er 31, 201f if fhe lime voir.re will be included fronn fhe ossessmenf
I
tr
I
of hedge effectiveness should be:
$
t'
v.
i
o. P'10,000 goin c. P700loss
$
b. 9,300 goin d" No goin or loss

103. The December 31, 201 I nel foreign exchonge goin or loss omounted to:
$

f
$
u o. P2.OO0 net loss c. P7O0 net loss
B
b. 1,300 net goin d. 700 goin goin
$

104. The Februory 14,2012 nei foreign exchonge goin or loss omounted io:

n o. P3,300 loss - OCI c. P3,300 loss - current eornings

I b. 3,300 goin - OCI d. 3,300 goin-cunenteornings
&
&.
l
I
3

I
672

Hedging o Foreign Currency Firm Sqles Commiiment

llems l0S lhrough 109 clre bosed on fhe foltowing informolion:

On December l, 201 l, Pedrito Corporotion entered into o firrn commitment to

sell speciolized equipment,lo Nwoke Troding compony for I million foerign
cunencies (FC) to be delivered ond settled on Morch 1,2O12. Pedrilo purchoses
o put option to sell I million foreign currencies (FC) on Morch l,2ol2, of o slrike
price of P0.92. The premium forsuch on option on December 1,201l, is p0.009
perFC.lnclude fhe limevolue elemenf in ossessinghedge efiecliveness ornonsplil
occounting is used. Following is the summory of the relevqnt doto: (osume o
l2% relevonl discount rote)

t t2/3t /2!ot t 3/t /2012

t2lt t20t
Spot rote (morket price) p.92 p.93 p.90
Strike price (exercise price) ......... .92 .92 .92
Option Premium for 31112012 .... p0.009 p0.006 pO.02O
105. The December 31, 201 I foreign currency goin or loss due to hedged item/
commitment should be:
o. P10,000 goin c. P9,803 goin
b. 9,803 loss d.0
106. The December.3l, 201I foreign curency goin or loss due to hedging
tronsoction {option controct) should be:
o. P10,000 goin c. P3,000 loss
b. 9,803 goin d. 2,994 loss
107 The December 31, 20,1 I Firm commitment occount should be:
o. P10,000 osset c. P9,803 liobility
b. 9,803 osset d. 3,000 liobility
l0B. The.20l I impoct on net income due to hedged item/commitment ond
hedging tronsoction {option controct} should -be (increose or decreose):

o. P9,803 increose c. P6,803 increose

b. 6,803 decreose d. 3,000 decreose
109. The 2012 net income shouid be:

o. P895,803 c. P915,803
b. 904,197 d. 963,803
Derivatives as Hedging Instruments in Managing Foreign Currency Exposures

I 10. On September I , 2011 , Jensen Compony received on order to sell a

mochine to o cuslomer in Jopon of o price of 100,000 yens. Jensen shipped
the mochine ond received poyment on Morch 1,2012. On September l,
201 l, Jensen purchosed o put option giving it the right to sell 100,000 yens
on Morch l, 2012, of o price of P80,@0. Jensen properly tJesignoted the
option os o foir volue hedge of the Joponese yen firin commitment. The
option cosl P2,000 ond hod o foir volue of P2,300 on December 3l ,2012.
The foir volue of the firm commitment wos meosured by refening to chonges
in the spoi rote. The following spot exchonge rotes opply:

Philippine Peso per

Doles JoFonese Yen
September l, 201 I P0.80
December3l, 2l I o.79
Mcrch 1,2012 o.77

Jensen Compony's incrementol bonowing rote is l2 percent. The present

volue foctor for two months of on onnuol interest rote of l2 percent (l
percent per month) is 0.9803.
Whot wos lhe net impoct on Jensen Compony's 201I income os o result
of this foir volue hedge of o firm commitment?
o. P -0-
b. P680.30 decreose in income
c. P300 increose in income
d. P980.30 increose in net income
I I I . Using lhe some informotion in No. I 10, whot wos the net
impoct on Jensen
Compony's2012 income os o result of this foirvolue hedge of a firm
commitment?
o. P -0-
b. P1,319.70 decreose in income
c. P77,g8}.3}inireose in income
d. P78,680.30increose in net income
l12. Using the sonre informotion in No. ttO, wnot wos the net increose or
decreose in cosh flow from hoving purchosed lhe foreign qurency option
to hedge this exposure to foreign exchonge risk?
o. P-G
b. PI,000 increose in cosh flow
c. P1,500 decredse in cosh flow
d. P3.000 increose in cosh flow
 I 13. On June 18, Lomo Corporotion entered into o firm commiiment to purchose
speciolizedequ.ipment from the okozqki Troding compony for y9b,000,000
on August 20. The exchonge rote on June lB ii vtoo'= pl'. To reduce the
exchonge rqle risk thot could increose the cost of the equiprnent in pesos"
Lomo poys Fl2,000for o coll option controct. This controCt gives Lomo the
9ptr9n to purchase Y80,000,000 ot qn exchqnge rote of yi 00 = pl on August
20. on August 20, ihe exchonge rote is Yg3 = pl. How much did Lomo s6ve
by purchosing the coll option (onswers rounded to lhe neoerst peso)?
o. PI2,000
b. ?48,215
c. P60,215
d. Lorno would hove been better off noi io hove purchcsed the
coll option.
ll4. on Morch l, chowking corporotion entered into o firm commitment to
p,ulqlgs_q-speciolized equipment from the Gifu Troding compony for
Y80,m0,000on June l.The exchonge rote on morch I is yi00= pl.To reduce
the exchonge rote risk thot could increose the cost of the equipment in
pesos, chowking poys P20,000 for o coll option controct. This controct
gives-chowking th e option to purcohse v80,000,000 of on exchonge rote
of Yl00 = Pl on June l. On June l, the exchonge rote is yl05 = p-i. How
much did chow s_ove by purchosing the coll option {onswers rounded t<>
the neorest peso)?
o. P20,000
b. P27,619
c. P47,619
d. Chowking would hove been belier off not to hove purchosed
lhe coll option.

tt-gg,qing" o Forecqsted Purchoses Tronsoction - Hedge Accounting Applies

(N_cYrspltf Accounfing: lnclude lhe fime yorue elemelnf in ossessirig ddage
effecfiveness)
*ltems t l5 through I l9 ore bqsed on the following informolion:

on.Jonuory l, ?01 I . Blyqg poid P I 7,000 cqsh to ocquire o coil foreign cunency
op'tion for 1,090,000 Thoilond Boht, with on expirotion dote of oe[errroer st,
!pi.l. tne_ qqtiol hedges 20lt forecosted imirorting purchoses ot-r,obo,oorj
Thqilond Boht. At June_30.201 l, imporl purchoses tototeil 750,000Thoitond Boht,
of which 600,000 Thoilond goht hbd 6een resold to Philippine customeis. iiri
firm! riscol yeor ends Jun e 30. tnclude fhe fi'me volue elem6rit rn orrelJing Eag"
effecfiveness or nonsplil accounting is used.

l /l /20r t 6/s0/201t t2/31 /2At t

Spol rote {morket price) Pl. t5 PI.IB P1.17
Skike price (exercise price) I .14 l.l4 l.l4
Foir volue of coll option al 6/3A/2011 P44,000
Derivatives as Hedging Instruments in Managing Foreign Currency Exposures . , 67 5

115. Whot is the intrinsic volue ilVl ond lime volue {TV) of option on lune 30,
2011?

lnfrinsic Volue lntrinsic Volue lime Volue

Volue Time
o. P4O,0O0 P4,000 c. P44,000 P0
b. 4,000 44,000 d. 44,W

I16. Whot the inkinsic volue (lV) ond time volue (TV) of option on December
is
31,2011?

lnlrinsic Votue lirne"Volue lnlrinsic Vslue TimeVolue

o. P40,O0O P4,000 c. P30,000 P0
- b. 4,ooo 44,000 d. 0 30,000

117. The foreign exchonge goin on opiion conlroct (hedging instrument) on

June 30,2011 to be recognized in cunent eornings should be:

o.' P30,OO0 c. P24,O0O

b. 27,W d. 21,600

I lB. The foreign exchonge goin on option controct (hedging instrument) on

June 30,2011 to be recognized in OClshould be:

o. P6,000 c. P4,8@
b. 5,400 d. 4,320

I19. The foreign exchonge goin or loss on cunent eornings on December 31,
2Al I should be

o. P5,400 goin c. P 8,600 loss

b. 8,600 goin d. 21,6@ goin

Hedsins q Forecosted Purchoses Tronsoction - Hedge Accounling Applies (Split

.acclun'tlng: Excfude fhe fime volue elemenf in ossesslng hedge efrecfl'veness)

lfems 120 through 126 dre bosed on fhe followinginformotion:

On June l, the compony forecosted the purchose of 5.000 unjts of inventory

from o foreign vendor. The purchose would probobly occur on September I
ond require the poyment of 100,000 foreign cunencies {FC).
It is onticipoted thot the inventory could be further processed ond delivered to
customers by eorly October.
on June l, the compony purchosed o coll option to buy lo0,0o0 FC ot o strike
(option) price of I FC = P0.55 during september. An option premium of p9o0
wos poid. chonges in the volue of lhe option will be excluded from ihe
ossessment of hedge effectiveness.

Spot rotes, strike price ond option volues ore os follows:

June I
lg. s I:W sepfember I

P0.53 P0.552 p0.52

Spot roie {morket price) .."...... P0.575
..... 0.55 0.55 0.55
Strike price {exercise price) 0.55
Foir volue of coll option P900 PI,350 p2,4OO P2,6@

on september l, the compony purchosed 5,000 units of inventory of o cost of

103,000 FC. The option wos settlecj/sold on September 'l ot ils foir volue of p2,600.

After incuning further processing costs of P20,000, the inventory wos sold for
P95.000 on October 5.

120. The foreign exchonge goin on option controct {hedging instrument) on

June 30:

oc, Eornings OCI Eornrngs

o. P450 PO c. P2fi P200
b.0 450 d. m 250

l2l. The foreign exchonge goin (loss) on oplion conlroct (hedging instrument)
on July 3l:

OCI Eornings OCI Eornings

o. Pl,B00 P(750) c. P2,000 P( 750)
b. ( r,800) 7fi d. 2,w0 1.500

122. lheforeign exchonge goin (loss) on option controct (hedging instrumeni)

on September l:

OCI Eornrngs OCI Eornrngs

o. Ps00 P{800) c. P2,000 P(750)
b.m7fi d. 2,500 ( s00)
Derivarives as Hedging Jnstrunxents in Managing Foreign curreicy Exposures " 577

123. The cost of inventory thot wos sold on October 5:

o. P56,650 c. P76,725
b. 5?,225 d. 79,225

.124.
The cost of soles ossuming thot OCI occount be closed to cost of soles
occount on October 5:

o. P56,650 c. P76,725
b. 59,225 d. 79,225

125. Whot is the odjusied gross profit orising from the obove tronsoctions?

o. iss,tzs c.
d.
P17,475
b. 18.275 15,77s

126. Whot is the nei income effect of the obove tronsoctions?

o. P35,775 c. P17,475
b. 18,275 d. 15,775

127. Qn November 1 , 2Ol1, Dos Sontos Compony forecos'ts the purchose of

row moieriols from o foreign supplier on Februory l, 2012, al o price of
2O0,O0O foreign currencies. on November l, 201 l, Dos sontos
poys PI,500
for o three-month coll option on 200.000 foreign currency with o strike
price of P0.40 per foreign curency tronsoctio.n. On December 3l , 201 I , the

option 'hos o foir volue 6t pt,tOO. The following spot rotes opply:

Philippine Peso Per

Dotes Foreign Currency
November 1, 201 I P0.40
December3l,2l I 0.38
Februoyl ,2012 0.41

Whot is lhe net impoct on Dos Sontos Compony's 2012 net income os o
result of this hedge of o forecosted foreign currency purchose?

o. P -O-
b. P400 decreose in net tncome
c. Pl,0OO decreose in net income
d. P1,400 decrecse in net income
128. Using lfle__sgqe informotion in No. t27,whot is the net impoct on Dos
sontos's 2012 os this hedge of o forecosted foreign curency purchose?
Assume lhot the row moleriols ore consumed ond become o porl.of the
cost of goods sold in 2012.

o. P80,000 decreose in net income.

b. P80,500 decreose in net income.
c. PB I ,l 00 decreose in net income.
d. PB3.lOO decreose irinet income.

129. woolseycorporotion, o Philippine compony, expects to ordergoodsfrom

o foreign supplier of o price of 2s0,000 foreign cunencies, with delivery
ond poyment to be mode on october 24. onluly 24, woolsey purchosed
o three-month coll option for 250,000.foreign cunencies ond designoted
this option os o cosh flow hedge of o forecosted foreign culrency
tronsoction. The following exchonge rotes opply:

Option strike price p 2.17

Option cost
' July 24 spot rote ........... .... p 2.17
October24spolrote.....,......!...........!.....;. p2"13
Whot omount will woolsey include os on option expense in net income
during the period Jvly 24 to October 24?

o. P4,000 c. P10,000
b. P5,000 ei. P 12,000

130. Atherlon, lnc., o Philippine compony, expects to order goods from o

foreign supplier ot o price of 100,000 foreign cunencies, with delivery ond
poyment to be mode on April l z. on Jonuory l z, Atherton purchoied o
three-month collopiion on 100,000foreign curiencies ond designoted this
optlon os o cosh flow hedge of o forecoited foreign .uir"nlv iioni"Jion.
The following exchonge rotes opply:

Oplion strike price p 4.34

Opiion cost ...............,........"...... p5,000
Jonuory l7 spot rq1e......"..... p 4.34
April I / spot rote .......................:............-......"...:...... p 4.26
Whot omount will Atherton include os on option expense in net income
during the period Jonuory 17 to April lT?

o. P4,000 c. P4,340
b. P4,260 d. P5.000
Derivatives as Hedging Instrunents in Managing Foreign Currency Exposures 679

Hedging o Forecosted Sqles Tronsoction - Hedge Accounting Applies (Nonsplit

Accounting: lnclude the fime volue elemenf in ossessrng hedge effecfiveness)

llems l3l through 136 ore bosed on lhe following informotion:

On Jonuory I, 201 l, George Fotimo, lnc. poid Pl6,000 cosh to ocquire o put
foreign exchonge option for 1,000,000 Thoilond boht, with on expirotion dote of
December 31, 2011. The opiion hedges 201I's forecosted exporting soles of
1,000,A00 bohl. G eorge Folrmob fb cal yeor e nds June 30. lnclude fhe fime volue
elemenlin ossessrng hedge effecfiveness or nonsptff occounfing is used.

| lI /2ot t 6/30/20tt t2l3t /201t

Spotrole (morketprice) .. Pl.2O P1.12 Pl.l5
Strike price (exerciseprice) l.l9 Li9 l.l9
Foir volue of put option st 6/3A/2011 PBl,000

l3l. Whot is the intrinsic volue (lV) ond time volue (TV) of option on Jonuory I ,
2CIlt?

lnfrinsicVolue TimeVolue lntrinsicVolue TimeVolue

o. P16,000 P 0 c. Pr0,000 P 6,000
b. 0 6,000 r d. 6,000 10.000

132. The foreign exchonge goin or loss on opiion controct on June 30, 201I
should be:

o. P5,000 'loss - cunent eornings c. P65.000 loss - OCI

b. 65,000 goin - OCI d. 0 goin: OCI
133. The Junp 30,201 I foreign exchonge goin orloss to be recognized in cunenf
eornings if zero export soles for 201 l:

o. lero c. P39,000
b. 26,000 d. 65,000

134. The June 30,201 I foreign exchonge goin orloss to be recognized in cunenl
eornings if export soles of 1,000,000 boht - oll occuned in December 201 l:

o. Zero c. P39,000
.

b. P26,000 d. 65,000
680 Chapter l2

135. The June 30,201 1 foreign exchonge goin or loss to be recognized in current
eornings if export soles of 1,000,000 boht - 60% ol which occured in the first
six months:

o. Zero c. P39,000
b. P26,000 d. 65,000

136.. The deferred goin or loss to be reclossified to eornings of the expirotion

dote - December 31, 201 I if export soles:

zero ror 20t t '.!'31?3?lil|,,

, 60% rorrhe rirst 6 monrhs
o. 70,000 goin 20,000 goin 28,000 goin
b. 65,000 goin 65,000 goin 26,0@ goin
c. 65,000 loss 55,000 loss '26,000 loss
d. 0 0 65,000 goin

Hedging q Forecqsted Soles Tronsoction - Hedge Accounting Applies (Split

Accounling: Exclude the,time value elemenf in ossessing hedge effecfiveness)

Items 137 through 140 ore bosed on lhe following informoiion:

Rito Con, lnc. onticipotes o sole to o foreign customer of l,400.000 foreign

currencies (FC) in six months. On Jonuory l, 201 l, when the spot rote wos Pl io
FC I .40, Rito Con purchosed on option to sell FC 1,400,000 on June 30, 201 l, for
P979,021 {P : FC I .43). The cosi ond the foir volue of lhe option of inception wos
P32.000.

The onticipoted sole tokes ploce on June 30,2011, but in the omount of FC
1,300,000, FC 100,000less lhon expecfed. Exclude fhe lime volue elemenl in
ossessing hedge effectiveness or split occounting is used. The firm's fiscol yeor
ends Morch 31.

The following tobles summorize lhe key doto: (nofe: exchonge rotes were
expressed in on indirect quototion)

t /t /20t t 3lsr/20t I 6/30/20t t

Spoi rote (morket price) ......... FC 1.40: Pl FC 1.45: Pl FC 1.50: Pl

Strike price (exercise price) ..... FC 1.43: Pl FC 1.43: Pl FC 1.43: Pl
Foir volue ot put option P32.000 P30.000 ?
Derivatives as lledging Instrumenls in Managing Foreign Cuffency Exposur\s 681

137. The foreign exchonge goin (or loss) on oplion controct {hedging instrument)
on Morch 3l:

OC, EorningsOCI Eornings

o. P13,504 P(15,s04) c. P(2,000) P0
b. (13,s04) ls,s04 d. 0 o

138. The foreign exchonge goin (loss) on opiion controct (hedging instrumeni)
on June 30:

OCI Eornings OCI Eornings

o. P32,184 P(16,496| c. PI3,6BB Pl5,5B8

b. (32,184]' 16,496 d. 45,688 116'4961

139. The reportoble soles omount once the octuol ironsoction occurs on jrn"
30 should be:

o. P866,667 c. P933,000
b. 909,092 d. 979,021

140. Ihe defened goin to be reclossified fo eornings fo reflecf lhe i,neffecftve

portion of the intrinsic volue of lhe option controct due to overhedging,
.l00,000
ot
the dote lhroi the occurrence of the remoining shortfoll of FC of
soles thot wos considered no longer proboble should be:

o.P0c.P13,504
d. 45,688

Fufures Contracl

Hedgingon Exposed Assef - "Undesignofed Hedges " or Hedge does nol reguire
Hedge Accounting

ftems l4l through 143 ore bosed on the fallowign information:

On December l,20ll, Lorien Compony mode o credit sole io o Koreon

compony. The omount of sole wos 100,000 Koreon won. Lorien will collect lhe
occount on Jonuory I ,2012. On December l, ihe exchonge rote of 40 Koreon
won for I Philippine peso. On December l, Lorien entered into o futures controct
to sell 100,000 Koreon won on Jonuory 1,2012ot on exchonge rote of 40 Koreon
won for I Philippine peso.
l4l. lf theexchongerotefor I Philippinepesoon December3l,2ol I is50Koreon
won, compute the foreign exchonge goin or loss on hedged item:

o.P0 c. P500 goin

b. 500 loss d. Not opplicoble, since it is o nonderivoiive controct

142. Compute the goin or loss on hedging instrument-future controct:

o.P0 ' c. P500 goin

b. 500 loss d. Not opplicoble, since it is o nonderivolive conkoct

;143. compute the net (totol) foreign exchonge goin or loss / the effect on net
income would be:
o.P0 c. P 500 goin
b. 500 Ioss d, Not opplicoble, since it'ls o nonderivotive controct

wifh Presen I volue: Hedging on Exposed Assef - 'undesignofed fledges" o r Hedge

does nof require Hedge Accounting.

lfems 144 through 147 ore bosed on fhe following informalion:

On Jonuory 1,2011, Rondolf Compony sold equipment to Jong Compony for

20,000,000 Koreon won, with poyment to be received in 2 yeors on Jonuory l,
2013. The exchonge rote on Jonuory 1,2oII, is 800won = pl. on the some dote,
Rondolf enters into o futures controct ond ogrees to iell 20,000,000 won on
Jonuory l, 2013, of the rote of 800 won = Pl.

on December 3l , 201 3, the exchonge rote is 290 won = p I . on December 3l ,

2O12, the exchonge rote is 830 won = P I . The oppropriote discount roie throughout
lhis period is l0%. For purposes of esiimoting futuie settlement poyments Jnder
the futures coniroct, ossume thol the cunent exchonge rote is the best forecost
of ihe future exchonge rote.

144. whot is lhe notionolvolue of the Koreon won futures controct?

o. P2O,661 c. P25,000
b. 22.727 d. . 25,316
145. Whot is the volue of won receivoble on December 31. 201 ll

o. P20,661 c.' P25,000

b. 22,727 d. 25,316
 Diriuatives as Hedginy Instrume4ti ii Managing'Foreign Currency Exposures
:

146. Whot is the foir,votueoJ,the futur'es controct On December3l,20l t?

q. P28/ c" P:'904

b. ' 316
L.

d. '2,666

147. Whot is the foir volue of the futures controct on Jonuory 1' 2013?

q. ' P284 c. P 904

b. 316 d. 2.066

Appendix for SMEs - Hedging

igme of the key differences between Full PFRSs ond PFBS for$MEs ore os follows:

Ihe PFRSf,orSMEs gives SMEs o choice of.followin$ Sections l l ond 12

' l..orPAs39inoccountingforoltoftheirfinonciotinsfrumen'fs'

2. ,Hedge occounting is not permitted with on op{ion.bosed hedging"

strotegy. Becouse hedging with options involves incuning o cosf, sMEs
,
'
I .:
o,.e.nrore likelyr fo use toryvordconlrocfs os hedging insfi'trments thon.
opfions.
I

ii$l,

r:.*:".."
684 Chapter l2

l. d \9. d 37. d 55. b 73. b 91. d 109. b 127. b

2. c 20. d 38. b 56. d 74. d 92. o llo. b t2B. c
3. b 21. c 39. b 57., o 75. b 93. o llt. d t2g. o
4. o 22. c 40. c 58. c 76. b 94. d tt2. b l3O. d
5. b 23. b 41. d 59. o 77. o 95. c ll3. b l3t. .b
6. b 24. o 42. b 60. o 78. o 96. c |4. d 132. b
7. b 25. c 43. o 61. b 79. b 97. c ll5. o 133. o
B. d 26. b 44. d 62. b 80. o 98. d 116. c 134. o
9. b 27. c 45. d 63. b Bl. c gg. c il7. d l3S. c
10. d 28. b 46. o 64. d 82. c 100. c ll8. b 135. b
ll. b 29. c 47. o 65. c 83. d l0l. o ll9. c 137. o
12. o 30. c 48. o 66. o 84. b tA2. b 120. d l3B. d
13. b 31.,o 49. o 67. b 85. b lO3. c t2t. c I39. b
14. d 32. c 50. b 68. c 86. c t04. o 122. d 140. b
15. c 33. d 51. o 69. o 87. o 105. c 123. d l4l. b
16. b 34. b 52. d 70. b BB. d 106. c 124. c 142. c
17. c 35. d 53. o 71. b 89. o 107. b 125. b 143. o
lB. c 36. o 54. c 72. d 90. o 108. c 126. c 144. c
145. b
146. o
147. c
l. (d)
l1/17/2011:Spotrote............ p 1.30
12/31/201I : Spotrote............ 1.42
Forex loss per unit p .12
Multiplied by: Number of foreign currencies I0,OOO
.
Foreign exchonge loss due io hedged item........... L !200 (d)
The loFrord rofe'is lhe roie quofed for the exchonge of two cunencies of o specified
future dote. lt difters from the spof rofe becouse of the difference in inleresf rqfes jn lhe
internotional f inonciol morkels.

A premium exisfs on on foreign exchonge foword when o party buys or sells forward ot
more thon fhe spot rote. A discounl exists on on foreign exchonge forward when o
porty buys or sel/s forword of tess thon lhe spol rofe.
Deriiartiyes as Hedging. Instruments in Managing Foreign CurrerycJ: Exposures 68 5

For recording purposes, premiums or d,'scounts hqve no bearing of all meoning there is '

no'need lo sel-up such occount. However, for option conlrocls wherein the wriler
ossurnes lhe responsibitity of incurring o potentiol ,oss, the writer chorges o fee colled
ct prcmium. Ihus, ihe premium is lhe pr:ce paid to ocquire the option.

bul os one moves closer fo lhe

The lorvqrd role gen'erolly differs lrcm the spot rote,
expiralion date (or sefflernenf date), the difference belween ihe spof rote and the ,

fowvord rale for the remaining period of the contracl becomes smoller ond srnorrer so
thql ot lhe exphation dsfe, fhe forward rqle will hove converged wilh fhe spof rofe.

2. (c)
lOtlllZOl l: Originolforword rote (90 doys) .'....'....................... P 1.30
l2l3l t2Q1l : Cunent (remoining) forword role (15 doys) ...'.... 1 '42

Forex goin per unil ............ ...................." P .12

Muttiplied by: Number of foreign currencies 10,000

Foreign exchonge goin due to hedging instrument P 1,200 (c)

Io defermine if o goin or loss occuned during anY two dotes, olwoys view;
(t) The lorword rcte oI fhe inception dsle os the buying rote (when buying
forwordJ, or fhe selling rote (if selling'forword), ond
(2) oll subsequent lotword roles os lhe opposile rofe. Becouse the fowvard rote
ol inception is fixed, merely osk "Did fhe opposite rofe moves lovorabty or
unfavorobty?" An increose ln fhe selling rote is favorsble, whereos on increose
in the bwing rqle is unfoYoroble.

3. (b)
Foir Volue of Forword Controci, net:
October 17,2011 (no initiol foir volue -
PAS No. 39 por. 43) i...!.!!................................. PO
December3l,20l l:
10/1712011: Originol Forword Rote
(10,000 boht x PI.36) P13,600
12/31l20l l: Current (remoining) forword rote
(10,000xP1.43)
For,ex goin on forword controct... 700*
Foir vqlue of forword controct, net, 1213112011
(o receivoble) ......... .. P 700 (b)

"Nel Poslllon Accounting"

Oclober t7,2lll: No enlry should be mode to record the forvvard controct becouse,
the fowvord has o foir volue of P0.

December 31, 20ll: (refer to No. 2 tor computation of goin)

Forvvard Controct Foreign Currency Receivoble.. 700
Goin on Foreign Currency Forward Con1roci............... 700
 "Gross" or "Brood" Accounling
October 17, 20ll:
Fonuord Controct Foreign Currency Receivob/e frorn
Exchonge Deoter (10,000 boht x pt.36 originol
t3,600
Fesos Poyoble to Exchonge Deoler t3.600
December 31, 20l. I
Forword Controct Foreign Currency Receiyoble from
Exchonge Deoler 700
Gain on Foreign Currency Forward Confrocf ............-.. ZO0

slr4 the loir volue of lhe lorword conhoclomounfed lo pT[Lcompuled os follows:

Forwqd Controcf - Boht (Foreign Cugency| Receivqbte from
Exchonge deoler, t2l3t/?l':^11 (l0,0OO baht x pI.43 cunent
remoining foiword role) .............. .. pl4,3OO
Pesos Poyoble to Exchonge deoler (l0,0OO bohl x p1.36
originol forword rote) 13,600
Net Posilion (o receivoble) P 700
Nofe; ln fhrs cose, the foreign currency foword controct is technicalty not accounted
for os o tair volue hedge. lnsfeod, it is occounted tor os on bxposed tiobilily, with gains
ond ,osses on lhe derivotive being recognized immediotely in income. However, becluse
the foreign currency payoble is remeosured using the current exchonge rote at
December 3l ,2011, with the resulting,oss being recognized in income stoiernenf, the
loss on the foreign currencY payabte ond lhe goin oi the derivative concel
out one
onother, ond the net etfect is the derivative hod been occou nted for os o forr yolue
hedge under PAS no. 39.

4. {o)
Foir volue of forword controct, nel,l2/3ll2ol I (o receivoble)-
refer to No. 3.................................................-....... p ZO0
lll512009 Loss on forword controct/hedging instruments
(Pl .40 - Pl .43) x 10,000 .................
Foir volue of forword controct, net, I /l s/2oo9 (o receivoble) p 400 (o)

Or, alternalively:
lO/ 17 /201 I {dote of hedging/inception of forword controcl}:
Cunent (originol) Forword Rote {90 doya forword rote) P 1.36
1ll5l20l2 (dote of seillement/expirotion): Spot Rote 1.40
' Goin (nel) on the entire fonarord controct ...... P .04
x: Number of foreign currencies - bohi 10.000
Foir volue of forword controci. neI, I lt Sln I 2 (o receivoble)
(o)
=L_lQg
Derivatives as Hedging Instruments in Managing Foreign Currenqt Exposures 687

Or, onolher apprcach is by using f-occounf:

Forword Controct Foreign Currency Receivoble from
Exchonge Deoler
|
I o / t 7 t2ol I ............................... 0
Goin .............................. 7@2
12131 1201 1 .................;
7ffi
goo3
111512012{,o
rNo iniliol foir volue of forword controct {PAS No. 39 por. 43)
'z(P1.43- Pl.36) x 10,000 - No. 7
3(Pl.4O - P 1.43) x 10,000*

s. (b)
Hedged llem: \

l2l31l2O1l: Spoi rote ........... P 1.42

. 1ll5l2}l2:Spotrote.................... 1.40
P .42
r0,000
P 200

P 1.43
't.40

Forex loss per unii

Multiplied by: Number of foreign currencies -Lq,@
Foreign exchonge loss due to forword controct....... 300

Nel impoct on nel income l:r.r.2A12- decresse (loss)........ lU_99)

ln hedging, one creofes o covnterbaloncinE posifion to on exposure. lf should be
noled for this type of hedge or forwaici contracl insfrumenf fhe tesf for "high
effecfiveness" is nof opplicoble, since lhis type of foword contract is considered os
i'undesig;nofed hedges" or "hedge does nol require hedge occouriling"

6. (b)
. fciir volue of Forword Controct:
September 1,201I {no initiol foir volue -
por.43)
PAS 39 0
December3'1,20i l:
91112011: current (Originol) Forword Rote
(HK$6.000,000/FlK$7.7) ......;...................... P7 79,221
12131l2}t I : Spot rqte (HK$6,000,000/HK$8.0) 7s0,000
Forex loss on forword conlroci 29,221
Foir volue of forword controct, 1213112011 (o poyoble) ?29,221 (bl
 *lJnder the forword conlroct, Romus must poy p779,221
to purchose HKg6,000,000 on
Jqnuoy l,?9!2.Equivolently, Rornus con moke o setflemenl paymenl if lhe peso volue
ot HK$6,a00,000 on Jonuory 1,20t2, is less lhon p729,22t, ond il con receive a poyment
if the vo/ue is more. ln fhrs cose, the value is p7so,ooo (HKg6,ooo,ooo/8.01, so Romu! rnust
rnoke o poyment.

7. (b) - refer to No. 6 for computolion.

8. (d) - HK$6,000 ,00O|HK$7 .7 = P779 ,221 .Ihe nolionol omount is the folol amovnl of fhe qscet
or liability thot underlies the derivotive controct. The notionot omount con be mis/eoding
becouse lhe volue of o derivotive is o function of chonges in prices or inferest rofel
ond is normolly equol fo lust o smoll frqclion of the notional omount of the underlying
osset.

A nollonol qmounl moy be expressed in lhe number of cunency unifs, shores, bushels,
pound or other unils specified in the finonciol insfrumeni.

the P779,221 is the notionol omount of lhe forword controct, but hos o foir volue of p0
(referlo No. 6 for computolion) on lhe doy the forword ogreement is signed, e.g. September
l, 2011. ln wmmory, lhere might be o possibflirry thal nolional omounft $ossly oyenlofe/
understote bolh lhe foir volue ond the potentiol cosh flows of the derivolive.

9. (b)- (P.28, spot rote on lhe dote of tronsoction x 100,000 bohts = p28.000)

t0. (d) - {P0.042.-PO.O37 = P.005 exchonge toss x 1,000,000 foreign curencies

= P5,000 x .9803 = P4901.5loss/liobility)

I l. (b) - (P.90,
the 60 doys.originol forword rote tess
p.93, the 12/3t lo}remoining
forword rote. (Nole: the gross or brood occounting method is used)
12. {o)- (P,90, the 50 doys originclforword rote times 200,000 bohts.)
13. {b) - refer to No. 6. lt should be noted thot the forword controct ogreement
is for the buyer to poy the originol forword rote.i

14. (q).- (P.92, lhe spot rote on the dote of receipt of lhe foreign currency,
which is olso the dote of expirotion of the forword controct.)

15. {c)
5/l: Originol forword rote (90 doys)......... p .693
6/30: Cunent {remoining) forword rote (30 doys) ......... .695
Forex goin per unit .002
Multipled by: Number of foreign currencies 500,000
Foreign exchonge goin due to heclging instrument p l,OO0
Less: Discount - P1,000 x 6%x3O/360 doys.........................;....... s
PV of foreign exchonge gain due to hedging insirument..... p 995 (c)
Derivalives as Hedging In.struments in.Managing Foreign Currency Exposures 689

Or, alternatively the computcllian of present volue mqy o,so be presenfed

os.'
Foreign exchonge goin ........... Pl,00O
Divided by: 11% + (6% l12x I month = equivolent
30 doys)l 1.005
exchonge goin due to hedging
PV of foreign
inslrument _l__9%

Nofe: Since, the discounf rofe is given il is ossumed that oll iimes presenf volue should
be compufed. Present volue for hedged ifern is nof necessory for exposed ossel or
liobility since spot rofe is in effect. lJnlike, the other fypes of hedging wherein, forword
roles is used lo delermine lhe goin or loss on fhe hedged ifem.

16. (b) - refer to No. l5 computotion.

17. (c)
The foir volue of the forword controct is the present volue of the nominol
volue of PI,000 which is P995 (refer to No. l5 computotion)

iB. (c)
Foreign exchonge loss due to Hedged ltem:
5ll: Spot rote ........... P .687
6/30: SPot role ........... .691

Forex loss per foreign cunency .04

Multipled by: Number of foreign currencies ..... 500,000
Foreign exchonge loss due to hedged item.... P2,000
PV of foreign exchonge goin due to hedging insirument
{forword controct - refer to No. l5) .................. 995

Net lncome effecl - decreose rI&(c)

19. (d)
(s/t:'originolforwordrote(90doys).........
8/l: Sooi rote ........... .696
Forexgoin percurrency................. P .003
Multiplied by: Number of foreign curencies 500,000
Totol Foreign Exchonge goin due to hedging
instrument (forword controci) ....:....................... Pr,500
Less: 6/30 cut-off - PV of foreign exchonge goin due
' to hedging instrument {forword contrCIct -
refer fo No. 15) ......:............. 995
August 1 - Foreign exchonge goin due to hedging
instrument (forword controct) E-J05(d)
20. (d)
Ihere is nofairvolue of controcton the dote of hedging orforward controict.
21.

P .80
.84
P .04
r 00,000
P 4,000
P .77
.83
P .06
100,000
6,000
P( 2,000)

22. {c)
Foir Volue of Forword Controct:
April 4, 201 I (no initiolfoir volue - pAS 39 por. 43)
June 30, 201 1 :
,. 414/2011: (Cunenl (Originol) Forword Rote
( I 00,000 rupees) xP.77l P77,400
6/30/201 I : Spol role (I 00,000 t upees x P.83) 83,000
Forex loss on forword
controct .......:.. :....... r........ 6.000
Foirvalue of forword conlracf 6l30/201I (o payabte) P5,000 (c)
*lncidento,lly, th,e en,try to.recognize the
foreign exchonge goin on hedging instrument
ond olso to reflect the foi volue of the forword controCt sh-ould be:
"Net Posilion" Accounting.
lpril /,2011: No entry should be mode to recard the forword controct.becouse, lhe
forord hos a foir value of P0
June 30, 2011:
Loss Fore.ign Cunency Foword Controct
-on
Fowvqrd controct Foreign Currency poyob/e........ 6.000
"Gross" or "Brood" Accounling
April 4,20Il:
Pesos Receivsble from'exchonge deoler
(100,000 rupees x P.77) ........... 77,000
oword Conlroct f oreign
F C unency poyable ......... 77,000
June 30,20ll:
LoSS on Foreign Currency Fowvord Conlrocl ................. 6,400
F onu ord C ontro ct F oreig n C urre n cy p ayo bt e ....... 6,040
stt4 fhe foir volue of ihe forward conlroct omounfed fo p6,ooo compufed os
follows:
Forword Controct Foreign Currency poyoble.. P83,000
Pesos Receivoble from Exchonge Deoler ......... 77,M
Net Position (o pcryoble)* .......,........
L0p9q
23. {b)
ioir volue of forword controct, 6l3}l201l (o poyoble) -
refer to No. 22...'........... P6,000
Loss of forword controci/hedging instruments [P'82 - P'83)
x 100,000 ( r,q00)
volue of forword controct, net, Bl2l20l I {o poyoble} "" Ps,Qoo (b)
Foir

24. (oJ - there is no foir volue of controct on the dote of hedging or forword
tdniroct.
only the sole lronsoction:
rtroct, therefore, on
25. {c) - No forword controct,
iFooss -F.oogg =
p.oooilbit t0 miilion i
ioreign currencies = P2,000loss')

26. (b)-
refer tcj No. 25'obove ...."'....... P2,000.001oss
' Hedginglnsirument/ForwqrdControct
"{P.dm4
- P.0032 goin x l0 million foreign ' '
JFi^o5o g"in x .97661..........-...................... 1,941 ,20 goin
irnun.iut
Net decreose in net income..!.."'-..';..r...a L j5&9Q loss

27. (c)
Foir volue of Forword Controci:
July I ino initiql foir volue - PAS 39 por' 43)
1. 201
P 0
SePtember30.20l l:
' 7lll20l l: burrent (Originol) Forword Rote 'P435'000
9'l3ol2ol I : Spot rofe 1v72,4s0,000/ I 05 vens) 455'714
Forex loss on forwordcontroct - 2A'714*

Foir volue of forword controct, 12131 lnll {o poyoble) P20,714 (cl

*lncidentolly, the entry to recognize the foreign exchonge goin.on hedging inslrumenl
onO reflect tne foir votue of the tarword controct should be:
"fro%
"Nel Posilion Accounting"
jut1 t, ZOt l: No entry slould be mode to record the foword controct
becouse, the forword hos o foirvolue of P0.

September 30,201t:
Loss on Foreign Cunency Forword Contract,." . 20,714
FoworddoniroctForeign Cunency Payooble 20'714

Forword Controcl Foreign Cvnency Poyobte .- 20,714

Cosh
692

underthe foruvord controct, Cohoon mustrec eive p43s,0a0 b sett{42,gs0,000

' on July l, 20t t. equivolentty, Cohooncon moke o seff/eme it..i..tni"ii
pesos if peso vctlue of Y47,850,000 onSeptember
30,201l, ri /ess than pl3S,OiOtO,
and it con ieceive o payment if 'the volue is more. ln fhis cose,
the volue is
P455,7 I 4 (Y47,BS),OAO / t }S),so Cohoon musl moke a payment.

28. (b)
Foir Volue of Forword Contrsct:
November 1,2011 p
. December3l,20l l: O

l\/!/2011: Cunent (Originot) Forword Rote. P435,000

121 31./201 I : Spot rote (y47,850,000/ I I 5 yens)
416.087
Forex goin on forword ccjnlrocl - 18,913*
Foir volue of forword coniroct, IZ/3I l2}lI .
- Pl8,9l3 (b)
Or, allernotively:
The fqir volue of the forword
Forword Controci Foreign Curency poyoble
-
controct orrrounted to p r g,g r 3- computed
- -'-'r os folows:
(p43s,000- plB,9l3) ....................:... p416,87
Pesos Receivcble from Exchonge Deoler.........
435,000
Net Position (o receivoble)* P 18,913

29. (c) - foir volue hedge

Hedged ltem/Commilmenl:
1O/02/2Ot l: Originol forwcrrd rote (180 doys) ........... p
.53
1 2/ 31 / 20 I I : Current (remoinin g).
iorworu. i.c ie
{90 doys)
Forex loss per uni|....................................
_ .59
" Multiplied by: Number of foreign cUnencies
P. .05
l,oo0,d00
Foreign exchonge loss due to heclged item/
commiimen|....................
P50,000
Hedging lnslrumenl:
1O/O2/2Ol l: Originol forword rote (180 doys) ...........
.53
12/31/2Ol l: Current (remoining) forurord rote
{90 doys) .58
Forex goin per unil. ... P .05
Muttipiied by: Numoei ;;;;6; ; ;;;;;;;
..::..::::.. r,000,000
Foreign exchonge goin due to fonrrord conlroct ...
50,000
Nel goin (loss)
PO
rhrs hedge rs co//ed o "pedecr" hedge ond fhe hedge
is considered to be hrgrty .efrecrive
which sqlisfies the B0% - t25%
"."ipfJOL'io-ng..
Derivatives as Hedpins Instruments in Managing Foreign Cutency Exposures 693

The lomord role generorry differs lrom lhe spot rdle, bul os orre rnoves closer fo fhe
expirolion dote (or sefllemenf dale), the difference befween the spot role ond fhe
foiword rate for lhe remo:ining period of fhe controct becotnes snrorter ond smolrer so
thot of the expirotion dote. lne fon*ord rste will have converged wilh lhe spof rofe.

protecting ogoinst on odverse chonge in lhe excho nge rote belween the order
'. dofe (coimifment dqte) ond.the fronsoclion dofe is hedging'o firm foreign-curencY'
denominaled commitment..

30. (c)- foirvolue hedge

The entry to record the foreign exchonge loss due to hedged iteml
commitmenf on Dece mber 31, 2Al I would be:

Foreign Exchange Loss--f irm Commifmenf ......-..'....-'- 50,000

Foreign Cunency Exchonge Firm Commitment
(o tiabilitY 50'@A

The Firm Commitment occount is o femporory account for orr unrecognized firm
commitment firm commitment. tf if hos o debit bolonce, if is shown in fhe ossef
section of the bolonce sheef when il hos o iredif bolonce, os il is in this problem, it
is shown in the liability secfion.

31. (o)
Foir Vslue of Foryord'Controct:
Oclober 2,2Oll: {no initiol foir volue - PAS 39 por. 43
December 31, 20l l:
1O/2t2O1l: OriginolForword Rote (180 doys)....'.. P .53
12/31/2Ol l: Curenl remoining forword role
. {90 doys) :................'.... '58
Forex goin Per unit ..'...... P .05
x: No. of yens ............ 1,000,000
Forex goin on forword conlroct.....
-- 50,000

Foir volue of forword controct, 12/31/2O11 (o receivoble.. - P50,000

:
32. (c)
Foir volue of forword controcl, 1213112011
(o receivoble) .............. ...............'.....,.'.'. P50,000
3 I 31 I 2Ol2 Loss f orword contrqcl/hedgin g instrument
'10,000
(P,58 - P.57) x 1,000,000...

Foir volue of forword controct, net, 3/31 t2012(o receivoble) ..... P40,000
33. {d) - foir volue hedge
December 31. 201 I bolonce of Foreign Cunency Exchonge
. Firm Commiimeni Account (o liobitity)...................... - Ps0,000
Morch 31 ,2012: Foreign Currency Exchonge Firm
Commilment Account (o receivoble)
12/31/201t: Curreni (remoining) forword rote
p
(l80doys).....j..:.....................:..............t........ .5g
3/31/2012: Spot rote* ..............:...... .57
Forex goin per foreign currency unii................. p .Ol
x; Number of foreign currencies
Foreign exchonge goin due to hedged ir"rl.o.*,trr,.* I0,000
Bolonce of Firm Commitment, Morch 31,2012
( o net liobility occount) ....................
|19,09q
-
" lf the dote of fronsocfion ond dofe of selflement of torward contract folls on the
. some dote, obviously the spof role ond fhe current (remaining) forword rofe shou/d
olso be fhe sqrne.

34. (b)
PAS 39 pat.94 stoles lhqt "When on entity enters into o firm commitment lo ocquire on
ossel or ossume o liobilily lhol is hedged ln q lqir vclue hedge, lhe initiol corrying omounf
ol lhe ossel or liobility lhot'resulls from lhe enlity meeiing the firm commitment is odjuslea
td include the cumukrtive chqnge in lhe foir vojue of tnJ firm commitment ofiributoble lo
the hedgdd risk thol wqs recognized in lhe bolonce sheel."

lncidentotly lhe enfries to record on:

7he dofe of tronsoction (dote of purchose and detivery of equpmen t) woutd be:
Equipmen.t (spot rote, 3/3t / 12, p.S7 x I,000,000) .570,00A .
. Cosh or lnvestme nt in Foreign
Cunency ... 570,A60

To remove the corrying omount of the firm commitment from the bolonce
sheel. ond odius.t the initial corrying omounf of the equipment thot resutts from
the firm commitment.
Foreign C unency Exchonge
Firm Commitment (No. 34 ).............
Equipment 40,000
Or. ollernotively:
Equipmehl $OpOO
Foreign Currenf Exchonge Firm Commitmenf
(net liabilityl. 4O,O0O
Cosh or lnvestment in Foireign Currehcy............ 570,000
Nole thol th.e Foreign Currenc.y.Exchonge Firm commitment account of p4o,ooo (o
liabilily) is effectively lro,nsfered fo oss,ef ocquired. The volue of fhe equipment shou)d
?q tlg-gris,fot forword rote on /he ocfober 2,2ort {dote of neagingj, p.53 /p.53 x
1.000.000 = P530,000).
Eerivatives as Hedging Instruments in Managing Foreign Currency Exposures 695
i
ln summory, lhe.result of these occounting entries is os follows:
Equipmdnf ..............,.'.... 530,000
Cosh or lnveslme nt in Foreign Cvrrency 530'000

which is somewhol reossuring given the storting presumplion. i.e. thot Asser
Tomoyo. tnc. hod effeclively fixed the purchose price of its equipment ot P530,000'

35. (d) - cosh flow hedge

36.
P .53
.58
.05
__t_papgq
P 50,000

37. (d) - cosh flow hedge

38. (b)
lncidenlolly lhe enlries lo record on:
Ihe dole oi tronsocfion (dofe of purchose ond delivery of equipment) would be:
Eguipmenf (spot rote, 3/31ll2, P.57 x 1,000,0Aq "... 570,0o0
. Cosh or lnvestme nt in Foreign Currency ....'-'.. 570'000

To remove the goin recognized in other comprehensive income ond the initiol
corrying omoun] of the equpment fhot resulls from lhe hedged transoction by
fhis omounf
Other Comprehensive lncome - goin 40,000*
Equipment .1.............,........................... 40,000

'"f30,.h'?if::l
3/31/2012: Spoi
::*:::.1:::
rote*............
P 5s
.57

Forex goin per foreign currency'.......".... P 'O4

x: No. of yens .............
. OCI-goin
* lf the dote of lronsoclion orid dote of settlemen t of f oruard conlrocf folls on ihe
some dofe, obviously fhe spot r-ofe ond lhe cunent (remaining) forword rate
should olso be lhe some.
7

696

Or, olterrrotively:
Eguipment ....................... S3O,0A0
Other Comprehensiye ,ncome - goin........... 40,OAO
Cdsh or tnveslment in Foreign Currency 570,000
Note fhol the Other Comprehensive lncome eccount of p40,000 is effectively
tronsferred to ossel ocquired. The votue of the equipment shoutd be the
original
fonvord rqte on the october 2, 20t I (dote of hedging). p.sg
re.se,lJoo.aoo = psao.ooo).
ln summory, the result of these occounting entries is os follows:
Equipment s so'ooa
Cosh o, rnu.ii,n'n; ; ;;;;;;; ;;;;;il . : :. :.:: :. ::: 530.000
which reflects the stortin$ presumption, i.e. thot Asser Tomoyo, lnc. hod
effeclively fixed
lhe purcho;e price of ils mochine ot p530,000. However, the route to-set lo lhis posilion
moy olso seem slighily convoluled.

39. hedge--p 1.3_0 spof ro te (on detivery dote ltronsoction dote)

Q ^ -rgilyglue
x200,000 bohf = P260,000 (b)

40. (c) - foir volue hedge

lncidentolly the enfries to record on:
rhe dote of fronsocfio n (dote of purchose ond detivery of equipment) woutd
be:
Equipment (spot rote, I l /30/t I, pt.3O x 200,000i .... ' iOO,OOO
Cosh or lhvesfmenf in Foreign Currency......... 260,000
To remove the corrying omounl of the firm commilmen I from the
bolonce sheef
ond adjust the iniliol corrying amount of the equiprnenf fhof ..rrti, from the
firm
commitment.
F oreign Cunency Exchonge

Firm Com mifmen t*.......

Equipment t0,000
*The foreign"rro"i/
"r.rr""g;
hedged item/commilment
;t, due fo
wostompufed
os follows:
l0/01/20r 1: Cunent forword rote p l.3S
fi/30/2Ot l: Spof rote............. t.30

i?,il g3:: 3? i :",:",;7^.x#i2,:, i, 0. 03:;

-'.%il'"T"rt:it::tr
tlle,t tt*
lf the dote of lronsocffo n ond dofe of sefflemenf of f orurord
conlract folls on fhe
some dofe,.obviousry rhe spof rote ond the cunent
shou/d o/so be fhe some.
lremoiiingl forword rote
Derivattlyesgl H447jly_lntlryl sures 697

Or. ollernolively:
Equipment 270,000
Foreign Cunent Exchonge Firm Commitment
losset/ 10'000
Cosh or lnvesfment in Foreign Currency,....... 260'000

Note thot the Foreign Currency Exchonge Firm Commitment occount of P10,000 (ossefJ
lo ossef ocquired. The volue of the equiprnenf shou/d be the
is effepfively trqnsferred
oriEinal forword rote on fhe Octotrerl , 201I (dote of hedging), Pl.35 (Pl.35 x200.400 =
P270,000).

ln summory, the resull of these occounting entries is os'follows:

Equipment ........ 270,000
Cosh or,nvesfment in Foreign Currency 270,000

which is somewhol reossuring given lhe storting presumption: i.e. lhot JMI Compony
hod effeciively fixed lhe purchose price of its eguiprnent ot P270,000

41. (d)
Hedged llem/Commilmenl:
2l1l2}l I: Originol forword roie:
FC 5,000,000 / 1.429 .........
2/28/2011: Current (remoining) forword rote:
FC 5,000,000/1.415............. 3,533,569
Forex loss on hedged ilem ............. P 34,519
Less: Discount -
P34,619 x 67" x 60 doys (Morch ond April)/360 doys 346
PV of foreign exchonge loss due to hedged itenn... P 34,273*
Hedglng lnslrument:
2ll /2011: Originol forword rote:
FC 5,000,000 / 1 .429 ..........................:...............i.... P3,498,9 50
2l28l2ol l: Cuneni (remoining) forword rote:
FC 5.000,000/1.41 5 .....:........................i......,.......... 3,533,569
Forex goin on hedging instrument P 34,619
Less: Discount -
P34,619 x 6%x 60 doys (Morch ond April)/360 doys 346
PV of foreign exchonge goin due to hedging inslrumeni P 34,273"
Nel lmpocl on nel lncome on Februory 28,2011 ................ P -0,

or4 ollernotlvely the computalion of presenl volue may olso be presenfed os.'
Foreign exchonge |oss............... P 34,619
Divided by: fl00% + (6%/12 x 2 months = equivqlent
to a0 doys)1.....................
........:"....... l.0l

*
PV of foreign exchonge loss due to hedging item.. | 34,n6*
discrepgngy of P3 due lo rounding off .
698 Chapre, t2

42. (b)
The entry lo record lhe foreign exchonge loss due to hedged ilem/commitment (refer to
' No. 4l| on Febr:uory 28,2011 woutd be:
Foreign Fxchonge loss-{irn Commilment...........,.......... ......... 34,273
Foreign Currency Exchonge Firm
Commitment (o liobitityl ..............:..... 34,273

43. (o)
Hedged llem/Commilmenl:
' 2/1l2otr: o;isil;t i;;ord rote:
FC 5.000.000 / 1.429 ......... p3,498,950
3/31/201I: Current forwqrd role*:
FC 5,000, ooo/1,400 3,571,429
Foreign Exchonge Loss due to Hedged ltem....,....... p 72,479
-- Discouni -
Less:
Pii,lrs x e%x 30 doys (month of Aprit)/350 doys 362
PV of foreign exchonge loss due to hedged ilem... P 72,117
, Less: PV of foreign exchonge loss due lo hedging item
on 2/28/2011 (No.42) . 34,273
PV of foreign exchonge loss due to hedged item,
3/31l20n .................. P 37,844
Hedging lnslrument
2/1/2Ol l: Originol forword role:
FC5,000,000/1.429....................3.......... p3,498.950
3/31/2Ol l: Cunenl forword rqte*:
FC 5,000, 000/l.4oo ...................... 3,s71,429
Foreign Exchonge Goin Hedged ttem
Less: Discount -
P72,479 x 6% x 3A doys (month of Aprit)/360 doys 362
PV of foreign exchonge goin due to hedged item . P 72,117
Less: PV of foreign exchonge goin due to hedging item
on 2/28/2Ol I {No. 42) 34,273
PV of foreign exchonge goin due to hedging instrument
3 /31 /201 I .........,........r..........:........... P 37,844
Nel impocl on nel income on Morch 3l,2Ol I .......... P -0-
*lf shou/d be noted thot the dofe of tronsocfion (Morch
3t, 20t l/ does not fall
within the some dote of seftlement of the forword controct (April 3a, 2012),
theref ore lhe spot rofe ond forword should nof be lhe some, fhus, such sifuofion
reguires fhe use of the cunent f orword rote to determine the gorn orloss hedged
item/commitment.

44. (d) - the PV (Foir Votue) of forword controct on Morch 31, 201 I is p72,l17
(r6fer to No. 43 for computotion).
Derivatives as Hedging Instruments in Managing Foreign Curcency Exposures 699

45. (d) - refer to Nos. 34 ond 40 obove for further discussion regording the
disposition of the Firm commitment occount.
3131 /2011 : Spot rote: FC 5,000,000/l .410............ P3,s46,Og?
Less: Foir volue of firm commilment (credit bolonce -
refer to No, 43 for compuiolion) 72,117

Volue of lnventory, 3131 I 2O1 I .................. ?3,4?1f|S'

46. (q)
3131 12011 Spoi rote: FC 5,000,000/,l.410 ...'........ P3,546,099
4 I 30 I 201 I Spol rote: FC 5,00O,OOO/ I .350 ............ 3,676,a7I@l
Loss on retronslotion of occounts poyoble ...'.'.. P 130,3,.I?
47. (o)
2/1l2}1l Originol forword rqte: FC 5,000.000 I 1.429 P3,498,950
4l31l2}ll Spot rote: FC 5,000,000 / 1.360 3,676,471

(Foir.volue) of forword conlroct, 4130nAO8.....:......... .,. !:)llg

48. - refer to No. 43 for furthel discussion regording lhe dote of tronsoction
(o)
ond dole of settlement of forword controct do not foll within the some
dote.
Hedged llem/Commitmenl
1O/12/2Ol l: Originol forwqrd rote (lO0 doys) '.....'.". P 3.15
12/11/2011: Currenl {remoining) forword rote
(7O doys) ........... 2.98

Forex loss per unit P ,.17

Mulliplied by: Number of foreign currencies _199,099
Foreign exchonge loss due lo hedged ilem
/ commilmenl ..............."..'.. P17,000
Hedging Inslrumenl:
- P
lOtlZtZOli: Originol forword,rote (lOO doys) 3.15
12/11/2O11: Current (remoining) forword role
{70 doys}
' 2.98

Forex goin per unit P .17

Mulliplied by: Number of foreign currencies 100,000
Foreign exchonge goin due to forwor.d contiocl ... P17,000

Nei impoct on income on December I l, 201L.................. P -0-

49. (o) - foir yolue hedge (refer lo Nos. 34 ond 40 for further discussion of firm
commitment)
Soles volued,ol spoirote gn lhe dote of delivery (tronsoction dote)-
December ll,20l l: P3.00 x 100,000 boht................. P300,000
Adjuslmenl.fo.r lhe foreign currency exchonge firm Commitment
- credil bolonce lrefer lo No.'48):
Foreign exchonge loss - firm commilmenl ..... I Z,OOO
Foreign Currency Exchonge Firm
Commilment ................... 12,000 r 7,000
Reporloble soles in the 201I income slolemenl P3r 7,000

50. (b)
On Accounls Recelvoble:
12/31/2011 : Spot rote P 3.09
12111l29l l:.Spot rote 3.00
Forex goin per unit P .09
Multiplied by: Number of foreign currencies 100.000
Foreign exchonge goin on the occounts receivoble
r_2!p0
On Firm Commitmen* The occount wos olreody closed since the soles
tronsoction olreody consummoted.
51. (o)
lO/l2l2O1l: Originol forword rote {100 doys) P 3.15
12/31/2O11: Current (remoining) forword rote (20 doys)....
,3.09
Forex goin per unit............
Multiplied by: Number of foreign currencies
P ..O7
r00.000
Foreign exchonge goin due to hedging instrument
Ig
s2. (d)
Hedglng lnshumenl:
lI/31 /2Ol ):.Cunent (remoining) forword role
{20 doys) P 3.08
|/20/2012: Spot rote.... 2.97
Forex goin per unit
Mulliplied by: Number of foreign cunencies
P .ll
100,000
Foreign exchonge goin due to hedging inslrumenl P
^ Accounls
On
-
Recelvoble:
I l,OO0
12/31 /2011 : Spot rqte .............
| /20/2Ol I : Spol rote..;...........
P 3.09
2.97
Forex loss per unit
Mulliplied by: Number of foreign cunencies
P .12
100,000
Foreign exchonge loss on the bccounts receivoble l2,o0o
Nel lorelgn exchonge goln ............ P 1,000
Derivatives as Hedging Inslruntents in Managing Foreign Curcency Exposures 701

53. (o) !1.i,

Goin on forword controct/hedging instrumenl:

3/1/2011 : Foir volue of forword controct PO
3/31/201.l: Foir volue of forword controct r,250 Pt,250
Loss on firm commiiment/hedged item:
3/1/2Ol I : Foir volue of forword controcl PO
3131/2011: Foir volue of forword conlroct r,250 1,250

Net impoci on Morch 31,201I quorter ended i___a

54. {c) - refer to ond 40 obove for furlher discussion regording the
Nos. 34
disposition of the Firm commitment occount.
Soles (spol role on dole of tronsoclion, P.l l8 x 500,000) P 59,000
-
Adjustmeni Firm cornmitment occounl:
2/1/2Al l: Originol forword rote:............. P .120
4/3O/2U l: Spot role*............ .l l8
Forex loss per foreign currency ..i................................. ? .o02
x: Number of foreign cunencies...................... 500,000
Foreign exchonge loss due to
hedged item/commitmenl/o liobilily , I,000
Adjusted soles ............ P 60,000
Goin on forword controcl/hedging inslrument:
3/3ll2}l l: Foir volue of forworcl conlroct P I,250
4/3Ol2O1l: Overollgoin due to hedging inslrumenl
(refer io obove compulotion) ........................... r,000 2s0
Loss on firm commitmeni/hedged item:
3/31/2O11: Foir volue of forword controct P r,250
4/30/2011: Overoll loss due to hedged item/
commitment (refer to obove computolion).. r,ooo 250
Nel impoct on June 30, 20ll quorter ended - increose.. P'60,000

ss. (b)
Cirsh inflow with forword controct [500,000 pesos x P.l2] P60,000
Cosh inflow without forword controct [500,000 pesos x P.l l8].. 59,000
Net increose in cosh flow from forword controct : P r,000
56. (d)
rJ/AlftQll: Originolforword rote {2 months) P l.0l
12131 /201 2:Cunent (remoining) forword rote (l month) . 99

Forex loss per unit.......-...........].".......... ...,................ P .o2

Multiplied by: Number of foreign cunencies 500,000
Foreign exchonge loss - olher comprehensive incom€............... P t0,000
r
702 Chaptet 12

s7. (o)
Jonuory l, 201 I beginning bolonce of foreign exchonge loss -
other comprehensive income (No. 56) ...................... P 10.000
Seillement dote of forword controct:
. 12/31/2011: Current (remoining) forword rote
(l month)............................................ p .99
1/31/2012: Spot ro1e.............. .9.8

Forex loss per unit

Multiplied by: Numbergf foreign cunencies.....................,. 500,000
Foreign exchonge loss - other comprehensive income --- " 5.000
Jonuory 31, 2012 bolqnce - olher comprehensive income -
loss (debil bolonce)
: 15,000
P

58. (c)
Soles P 600,000
Less: Cost of goods sold:
Cosl of goods sold of spoi role on tronsoction
do1e............ p 490,000
Add: OCI - debit bolonce (No. 57) 15,000 5O5,OOO

Gross profit P 95,000

lf o hedge of o forecost tronsoclion subsequently results in the recognition of o non-

finonciol osset or o non-finonciol liobility, lhen o choice of occounting policies is ovoiloble.
ln these circumslonces, on entity should either (pAS 39 por. 9g):

reclossify the ossocioted goins ond losses thot were recognized in olher
comprehensive income lo profil or loss in lhe some period (s) during which the
osset ocquired or liobility ossumed qffects profit or loss, e.g. in the periods thot
depreciolion expense or cosl of soles is recognized. Howevei, if it is expecled thot
oll or o portion of o loss recognized in other comprehensive income will not be
recovered in one or more future peribds, the qrnounl, thot is nol expeclecl to be
recovered should be reclqssifieO irom equity lo profit or toss. fssentiolly tfris ii ffre
some os for hedges of finonciol ilems; or

remove the ossociqted goins ond losses lhoi ,arere recognized in olher
comprehensive income ond include lhem in lhe initiol cost or othercorrying qmount
of the ossel or liobility os o "bosis odjustmeni.

59. (o) - goin or loss from hedging instrument should be recognized in other
comprehensive income.
1/01/2Ol l:Originolforword rote: FC I3,SOO,0OO / 14A............ p 96,429
3l3l/2011: curreni (remoining) forword rote: FC 13,500,000/l 42......... 9s.o7o
Forex'goin on hedging instrument I equity
Less: Discount ...
- Pl ,359 x 6% x 3/12 (Aprit to June) ................................. ZO

PV of foreign exchonge goin due io hedging inslrument - OCI ......".... P 1,339

:
,"rr"r;"t
at irrrt
Ar, slternalivelY lhe computofion of presenf volue may olso be presenfed oS"

" Foreigneichongegoin-OCl "".""""""' P l'359

. Divideo oy: trOOZ i (67a/12 x 3 months remoining)l ';"""""""""" 1'015
PV of foreign exchonge goin due lo hedging insirumenl P r.339

60. (o)
ioir Volue of Forword Contrqct:
Jonuory 1, 201 I ..:.........:.-.... PO
Morch 31, 201 I {refer to No. 59 computotion) .......""'."""' ' 1,33?

PVofForwordCon1roct,3/3ll2o11.....'''.........'...'......' I1,392
61. (b)
/ I40:.."""""""'
1/|/2011: Originolforword rote: FC I3,500,000 P 96,429
6rc0/20ll:Spotrote:FC13,500,000/144 """"":'i""' 93,750

Toiolforeign exchonge goin due to hedging instrument P 2,679

Less: PV of:foreign exchonge goin due to hedging instrument
on 3/31 t2}1l * No.59 ..""'""""""':"' . r,339

Foreign exchonge goin due to hedging insirument, 6t3Ol2A11 P_i!1g

62. (b) -
ioles volued ot spot rote on June 30, 201 I : l3'500,000/1 44 """ P 93,750
Add: Closing of foreign exchonge goin due to
hedginginstrumeni-OCl(No.61)'....'........'.'. 2,679

Reporioble soles omount oh June 30,201 I P 96,429

63. (b)
Net goin or loss on ovoiolble-for-sole security:
Fiom lnvestmeni:
Goin os o result of chonges in equity price - Equity:
t(Fc_'^99,!99I FC.' 99f- (Fc I 00,000 x P l'00)l =

ro,, o, i ?ul3r'to3t0.%?l J.t 1 ; i;;; u ; ;;;;; ; s; ;;i;; - r.Ti;f :

t{Fc 100,000 / 0.6s) - {Fc 100,000 / 0"60)1,
. meosured of sPot roles | 12,821)

Net goin P64,r02 (b)

 Chapter I2

64. (d)
Net foreign exchonge goin or loss, Morch 31, 201 l:
Loss {in lnvestment) os o result of chonges in foreign exchonge rotes:
[(FC 100,000 / 0.65] - (Fc 100,000 / 0.60)1,
, meosured ot spot rotes .......... p(lz,B2ll
Hedging lnstrument / Forward Coniroct:
lll/2011: Originol Forword Rote:
FC 100,000 0.62
/ P161,290
3/3112011: Cunent Remoining Forword Rote:
FC 100,000 /0.66 l5l,5l5
Goin on hedging inslrument P9,775
Less: Discounl - P9 ,77 5 x 67" x 90/360
(remoining doys) t4v 9,628*
Net goin on foreign currency _t3J_?3 (d)
*presenfvo/ue

6s. (c)
Net goin or loss on ovoiloble-for-sole security, June 30, 201 l:
From lnvestment:
Goin os o result of chonges in equity price - OCI:
r(Fc I 00'000 x5?3;3?%
lll l ll:133 I ll iSll P71,429
Loss os o result of foreign exch'onge rotes os meosured
by spot rotes on the ofigirrol FC 100,000 bolonce:
[(FC 100,000/o.7ol - {Fc 100,000/0.6s)] { r0,989)
Loss os o result of chonges in foreign currency os
meosured by spot rotes on the incrementol
FC 50,000 bolonce orising during prior period:
[(FC s0,000 /o.70) _ (Fc 50,000 / 0.65]l ......... ( s,4e5)
Net goin, June 30,201I P54,945 {cl
66. (o)
Net foreign exchonge goin or loss, June 30, 201 l:
Loss-(in lnvesJae{)_q: o result of chonges in foreign exchonge rotes:
[(FX 100,000 I O.7Ol - (FC 100,000 / 0.6s)1. meozured
ot spot rotes........." P(r0,989)
Hedging lnstrument / Fon*ord Controct:
lll/201l: Originol Forword Rote:
FC 100,000 10.62 P161,290
6/30/2011: Spot Rote: FC 100,000
/0.70...... 142,857
Totolgoin on hedging instrument. p 18,433
Less: Goin on hedging instrurnent, 3Bl/?f'.ll .. 9,629 8,804
Net goin on foreign curency r_&!!j (o)
Derivatives as Hedging hstumeilts in Managing Foreign Currenqt Exposures 705

67. {b) - refer to No. 66 tor computotion.

68. (c)
|Il1l12011:Originolforwordrote(IB0doys) P
........ LI99
12131 12011 : Current {remoining) forword role (I 20 doys) ...... I .l 87
Forex goin per unii .012 P
Multiplied by: Number of foreign cunencies ....................:........ 1,0@,000
Foreign exchonge goin ...........

ln speculoling. one is rnerely trying to goin - nol lo creqle on ofiselfing positrbn.

Foreign exchonge fowords used in speculolions ore volued ot the change in the Jomqrd
rate tor the remdining life of the confroct.

69. (o) - refer to No. 58 for further discussion.

12131/2O11: Cunent (remoining) foword rote (120 d,tys) "..... P I.r87
4130 /2012: Spot rote ............ 1.210
Forgx loss per unit P .023
Multiplied by: Number of foreign cunencies r,000,000
Foreign exchonge loss due to speculolion ............. t ?9,000 (o)
70, (b) - refelto No. 68 for further discussion.
|2lo|l2o1l:originolforwordrote(90doys}......... P 2.36
12/3112011: Cunent (remoining) forword rote (60 doys) ........ 2.37
Forex goin per unit P .01
Multiplied by: Number of foreign cunencies 100,000
Foreign exchonge goin ........... L l-€00 tb)
71. (b)
' 12131/2011:Cunenl {remoining) forwordrote(l20doys) ...... P 2.37
3ft112012: Spot rote 2.42
' Forex goin per unif ............ P .05
Multiplied by: Number of foreign currencies r00,000
Foreign exchonge goin due to speculotion ............. l_9,000 (b)

72. (d) - refer to No. 68 for further discussion.

forword rote (60 doys) .........
? l0l12011 : Originol P 20.99
121311201l: Cunenl (remoining) foword rote (30 doys) ........ 20.m
Forex loss per unit P .99
Multiplied by: Number of foreign currencies 50,000
Foreign exchonge loss due to speculotion ............. 112,599 (d)
73. (b)
121121201l: Originol forword rote (90 doys) ......... P .90
12.131120l l: Cunent {remoining) forword rote (71 dqys} ........ .93
Forex goin per unit .................... P .03
Multiplied by: Numbei of foreign c.unencies ...............,..........r.. r00,000
Foreign exchonge goin due to hedging of exposed liobility P 3,000 (b)

74. (d)l- tmporting tronsoction

1211212011: Spot rote (dote of tronsoction) ........... P .87
12131/2O11:Spotrote (boloncesheetdote) ...:...:......:.............. , .o^
Forex goin per unit P .05
Multiplied by: Number of foreign cunencies 100,000
Foreign exchonge loss due to revoluotion of occounts poyoble . I_149q (d)
7s. (b) "

12/12/2011: Orginolforword rote (90 doys) ......... P .90

12/31l21l l: Cureni (remoining) forword rote {71 doys) ........ .93

Forex goin per unit ....:........ P .03

Multiplied by: Numberof foreign currencies 100,000
Foreign exchonge goin due to foreign currelncy commitmeni I J,000 (b)

76. (b)- refer to No. 58 for further discussion.

12/lU2Al1: Originolforword rote (90 doys) .............................. P .90
12/311201l: Curreni (remoining) forword roie {71 doys} ........ .93
Forex goin per unit P .03
Multiplied, by: Number of foreign cunencies ..................:.......... I 001000
Foreign exchonge goin due to speculotion ............. P 3,000 (b)

77. {o)
12131l2}l l: Originol forword r.ote (365 doys) ......... P .435
121 31 1 2012: Spot rote ............ .400

, Forex goin per unit .......,..............i!...r!!.. P .035

i'arrripi*o uy: Numoer of foreisn .r;;;;;l;; :..:..::..:::..:.::,:........ 2,300,000
Foreign exchonge goin - OC1............ l_ i9,s00 {o}
A hedge of the foreign currency exposure of o net invesfmenl in o.foreign operotion
maY result in o gain or o /oss. Assuming the hedge is designoied os such. lhe goin or loss
shou/d be reported in lhe sorne way that lhe lronslotion odjuslmenl is reported lo the
exlenf thot the hedge is effecfive. Therefore, fhe goin or /oss troceoble fo hedge
effecliveness will be reporled os o cornponent of equity.
78. (o) - refer to No. 77 tor further discussion.
Cumuloiive Tronslotion Reserve - OCI
Jonuory 1,2012bolonce 129,000 | 8O,SOO foreign exchonge goin-
forword {No.77)
.l00,000
F/S tronslotion reserve - loss -..

December3l, 201 2 .:........-....... 148,500

79. {b} - refer to No. 77 tor furfher discussion.

(l yeor)......,............::"':"""'i P .40
\zlzl lzol l: Originol forword rote
613112012: Cunent (remoininglforword rote (6 monlhs) """' .36

Forex goin per unit P .04

Multiplied by: Numberof foreign cunencies 600,000

Foreigh exchonge goin - OCI'..........' P 24,000 (b)

80. {o) - refer to No. 78 for further discussion.

Cumulotive Tronslotion Reserve - OCI

foword (No.

Bl.
"""' P
{c)
'alSOtZOt2:
Cunent (remoining) forword rote (6 months) .35
12131 12012: Spot rote ..........'.
.p
Forex goin Per unii """"":" P .06,
Multipiied by: Number of foreign cunencies' 600,000

Foreign exchonge goin - OCI'........... P 36,000 (c)

82. (c)
Cumulotive Tronslotion Reserve - OCI

June 30; 2012 bolonce {No. 80) 22,000 36,000 Foreign exchonge goin-
forword (No.8l)
14,000 December 31,2012

83. (d)
rote
12131/2O1.l : Currenl SPot P ].40
Multiplied by: Number of foreign currencies 50,000,000

Loon poyoble. December 31, 201 1 ......... P70,000,000 {d}

84. (b) - Hedging using o Nonderiyolive lnslrumeni
610l l20l l: Spot ro1e............ p 1.20
12/31l21l l: Spot rote
Forex loss per unit p .2A
Multiplied by: Number of foreign cunencies ..... 50.000.000
Foreign exchonge loss - OC|.................... p10,000,000 (b)

85. (b)
lnterest expense: 50,000,000 rupees x 5% xpl .30 overoge
exchonge rote (tronslofing expense occount under
PAS No. 21, wherein spof rofe would nof be procticat
fo be delerm ined, overoge rofe m ay be usedi ............. p3,250,000
lnterest poyoble : 50,000.000 rupees x 57" x p I .40 cunenl rote
(tronsloting liobilify occounf under pAS No. 2l requires
the use of cunent rote of lhe bolonce sheef dofel ....... 3,SOO,OOO {b}
Foreign currency tronslotion loss ............ p 250,000

tncidentolty, the entry to recordthe inferesf would be:

lnteresf expense.......... 3,250,0ffi
Foreign cunency tronsocfion loss ............... 2SO,WO
Interest payoble ............. 3,5@,WO

86. (c) - referto No. 85 for computofion. Nole thot the amountof lhe offsel lo eqvity
occounf is limited fo fhe effective portion of fhe hedge bosed on the revoluation
of fhe ossefs. Any excess is /oken direcily to fhe income stolemenf.

87. (o)
Cumulolive Tronslotion Reserve - OCI
Foreign exchonge loss lr,0m,m0 December3l, 2010 bolonce
(No.84) 10,000,000 950,000 F/S tronslotion goin
r,950,000 (o)

88. (d)
12/3112012: Cunent spot rote .......... p r.05
Multiplied by: Number of foreign cunencies ..... 20O,O0O,OOO
Loon poyoble, December3l,20l 2.................................... ....I?19,000,9q0 (d)
Be. (o)
Dote of loon obloined: Spot ro1e............ P 1'O22
12/3112012: Spot ro|e............ """"""' l '050

Forex loss per unit :.'.'.........."... P '028

Multiplied by: Number of foreign currencies ""' 200,000'000

90. {o)
Cumuiotive Tronslotion Reserve - OCI

Foreign exchonge loss (No.89) 5.5m,000 5,780,000 F/S tronslotion goin

(o)

lfems 9l throvgh gTSqlution Guide loble

November I I December3l January 30
Spot rote (Morkel Price) ........ P 1.22 P 1.23
Strike price (Option Price) ..... |P 1-?q
l,?9 P 1.20 P 1.20
Notionol omounl {in Boht) ... 100,000 100,000 100.000
lnlrinsic volue (if Morkei
is > Option (strike)*........ P 0 P 2,000 P 3,000
Timevolue**............................ P 900 P2@PO
Foir (totol) volue of Option .. P 900 P 2,200 P 3,000
*(Morket Price - apfion Pricel x nolionol omount
*+Fair volue of oplion less lnfrinsic Volue

9l . (d) - fne nolionot smovnt is the lotol face omount of lhe osef or liobility fhot under,ies
lhe derivotive controct. A nolionol omounf mory be expresced in lhe number of cunency
nits, shores, bushels, pounds or other unifs specified in the tinonciol inslrumenL Choices
tetter (o), {b), ond (c) are atl fair votue of the oplion conlroct at dilferent dotes.

92. (o)
On l2ll3l20tt:
Foir volue of Coll OPtion P2,m
lntrinsic Volue: (Pl.z2Spot rote - Pl .20 Exercise price,
lower if coll option) x 100,000 boht .......... 2,000

Time Volue ...........:........ ..................... l-2QQ (o)

93. (o) - (P900 - P200 = P700 loss); refer to lhe solution guide toble for further
onolysis.

94. (d) - (P2,000 - PO = P2,000 goin); refer to the solution guide toble for further
onolysis.
F.
*.

95. ,(cl - (P2,200 - P900 = Pl,30o goin); refer to the sotution guide toble for
furlher onolysis.
96. (c)
Foreign p- yryglgy lronsoctrbn ( H e dge d tf e m) :
1 I l0l /2011 : Spot rote................................
12/31 l2O1 I : Spot rote............
P 1.20
1.22
Forex loss per unit .....
Multiplied by: Number of foreign currencies
P .O2
100,0@
Foreign exchonge loss .................................
Hedging lnstru menf / Fledging Tro nsaction / Option Confroit:
P 2,000
lnception dote:.Foir volue of coll option
Bolonce sheet,dote: Foir volue of coll option
P 900
2,2@
Foreigrr exchclnge goin
Net foreign exchonge |oss .............

e7. (c)
Foreign Q yn91cy Tronsocfion (Hedged |tem) :
| 2/ pot ro te ...............:.................
31 I 2Ol I : S 1.22
1/30/2012:Spot rote 1.23
Forex loss per unit
Multiplied by: Number of foreign cunencies ........... ........
P .0r
r00,000
Foreign exchonge loss .............
H e d gjng ln str u me nt / H e d gin g Ironsoc lion / A pfi o n C onfro ct :
P 1,000
Bolonce sheel dote: Foir votue of coii option
Expirotion dote: Foir volue of coll oplion
P 2,200
3,000.
Foreign exchonge goin........... ........r....;!....,.r.. P BOO
Net foreign exchonge 1oss............. .................i......... !--2QQ (c)
lfems 98 through l04SotulionGurde Table
December 16 December3l Februory 14
Spot rote (Morket price) ........ p .16 P .15 P .147
Skike price (Option price) ..... p .16 P .16 .16
Notionol omount (in Bolivor) t,000,000 1,000,000 r,000,000
lntrinsic volue (if Morket
is < Option (Strike)......... p O P 10,000 P 13,000
Time volue**................ p 4,000 3,300 0
{Totol) volue of Option .. p 4,000
,Foir
P 13,300 P 13,000
*(Option Price Market price) x notionot
-
**Foir velue of option less lnlrinsic
omount
Volue
Derivatives as Hedging Instruments in Managing Foreign Currency Exposures 7I I

98. (d) - refer to No. 9l for further discussion on notionol omouni.

\

ee. (c)
On December3l,20l l:
Foir volue of Coll Option P13,3OO
lnirinsic Volue: (P.16 Option price less P.l5 morked price,
lower if put option) x 1,000,000 bolivor 10,000

Time Volue P 3,300 (c)

I 00. (c) - (P3,300 - P4,000 = P700 loss); refer 1o the solution guide loble for further
onolysis.

t0l. (o) - (PIO,0OO - P0 = Pl0,O00 goin); refer to the solution guide loble for
further onolysis.

102. (b)
H edging lnstr u ment / He dging Ironsocfion / Option Controcf:
lnception dote: Foir volue of put option P 4,000
Bolonce sheet dote: Foir volue of put option................. r3,300
Foreign exchonge goin ........... P e,309 tb)

l03. (c)
Foreign Currency lronsoclion (Hedged ttem):
121 1 6 1201 1 : Spbt rote ............ P .16
12/31 I2Ol I : Spot t ote...............:................ .15
-:-
Forex loss per unit P .0r
Multiplied by: Number of foreign c_unencies r,000,000
Foreign exchonge loss ............. P 10,000
H ed ging lnstr u m e nt / H e d ging lronsoc fion i O pti6 n C ontroct :
lnception dote: Foir volue of pui oplion .....................;... P 4,000
Bolonie sheet dote: Foir volue of put opiion r3;300
Foreign exchonge goin ........... P 9,300
Nel foreign exchonge loss ............. I----ZQQ (c)
712 Cltapter l2

l0a. (c)
Foreign Curre ncy Tronsoction (Hedged ltem) :
l2l3l /2011 : Spot rote............ P .150
2l I 4/2012: Spot rote................................ .147
Forex loss per unit ............ P .003
Multiplied by: Number of foreign currencies r,000,000
Foreign exchonge loss ............. P 3,000
H e d gi ng lnstr u me nt /Hed gi ng
ironsocfion / O ption Cs ntro ct :
Bolonce sheel dote (12/31/11): Foirvolue of coll option. P r3.300
Expirotion dote (2114112): Foir votue of coil option ....... r3,000
Foreign exchonge loss ..........".. P 300
Totol foreign exchonge |oss.......... P 3,300 (c)

l0s. (c)
lill/2Ol I Spot rote ............ P. 92
12/31/201 I Spot rote ............ ..:................. .93
Foreign currency goin ........... P .01
x: No. of foreign curencies r,000.000
Foreign currency goin due to hedged item/commiiment.... P r0,000
Less: Discount - P10,000 x12%x2/12 (Jonuory ond Februory m
PV of foreign exchorige goin due io hedged item/commitmenl P 9,800*(c)

or, ollernolively the compulotion of presenf valae moy also be presenfed

os:
lgrgrOn exchonge goin - OCt ............ p tO,O00
Divided by: [007o + (12%112 x 2 months remoining)] .... LA2
PV of foreign exchonge goin due to hedged iiem/
commitment .,............. p 9,803 (c).
*P3
drscre poncy due to rounding-off .

105. (c)
l2/l l20l I Foir volue of Option (P10,000 x p.009) P9,000
12/3112011 Foir volue of Option (P10,000 x p.006) ;................... 6,m0
Foreign curency los on hedging tronsoction (option controct) .. P3,000 (c)

107. (b) - refer to No. 105 for computotion. lt is on osset being o debit bolonce.
Thus,lhe entry should be:
Fkm Commitmenl....... g,g13
Foreign Cunency Goin on Hedged tteml
Commitmenf .............................. 9.803
Derivatives as Hedsins Instrunients in Managing Foreign Currency Exposures 7t3

l0B. (c)
PV of foreign exchonge goin due to hedge<1 item/commitment
(refer to No.105) ......:............. P9,803
Foreign currency loss on hedging tronsociion (option controct)
- refer to No. 106) ............ ( 3,000)

lmpoct on net income - increose P6,l9Q3 (c)

l09. (b) - refer to Nos. 34,40 ond 50 fur further discussion on firm commitment
occount.
Soles {3/l /2O12spol rote: P.90 x FC 1.000,000) ...'.........'.... P900,000
Adjuslmenl: Firm Commilment Account bolonce
(credit bolonce) - since the P20,000 is o foreign
currency loss then the firm commitment occounl is
o credil bolonce...... 20,000*
Adjusted Soles............ .................... P920.000
Foreign exchonge loss on hedged item/
commitment, 3/31 /2012:
12/ 1 /2Oll Spot roie..............
3131/2012 Spol role.... ...................:.................';. -90

Foreign currency |oss ...............

x: No. of foreign currencie 1,000,000
Foreign currency loss for lhe enlire hedged item
/commiiment................. ...... P 20,000*
Add bock: PV of foreign goin due io hedged ilem
9,803 {29,803)
Foreign currency goin on hedging lronsoclion (option conlroct)
12/31/2Ol I (bolonce sheet dole): Foir volue of oplion
(P0.006xFC 1,000,000)......................................... P 6,000
3/l /2012 (expirotion dole) : Foir volue of option
(P0.020 x FC 1,000,000) r 4,000

lmpocl on Nel lncome....... no4,197_

r r0. (b)
Hedged llem/Commllmenl:
9 lOl l2Oll : Spot ro|e.............. P .80
12131t2}l l: Spot role ............ .79

Foreign curency loss per unit.............. P .01

x: No. of foreign cunencies ..:................... r 00,000
Foreign currency loss due to hedged item/
commitment..,...,............. P 1,0@
ol !@ for l2 periods
x: PV foctor of on onnuity of Pl .9803
PV of foreign exchonge loss due to hedged ilem/
commiiment.........."......... P 980.30
TI
r
I

714 Chapter l2

Hedging Inslrument:
9lol /2Ol l: Foir volue of Option P 2.000
12131/2O11: Foir vqlueof Option .........,............ 2,300
Foreign currency goin on hedging tronsoclion
"(oplion controct) 300.00
Net impocl on 20l l lncome - loss (decreose)................... P 680.30

il r. (d)
Soles (3/l /2012 spol role: P.77 x FC I00,000) ...................... P 77,000
Adjustment: Firm Commilment Account bolonce
. (credil bolonce) - since the P3,000 is o foreign
currency loss then the firm commitment qccount is
o credil bolonce..... 3.000*
Adjusted Soles F eo,ooo
Foreign exchonge loss on hedged item/
. commiiment, 3/31 /2012:
9lO1/2011: Spot rote P .80
3/O1/2Ol2 Spot role .77

' Foreign currency loss ............... P .03

x: No. of foreign currencies...................... r 00,000
Foreign currency loss for the entire hedged item
/commitment P 3,000*
Less: PV of foreign loss due to hedged item
/commilment ........-........ 980.30 12,019.70)
Foreign currency goin on hedging inslrument
(option conlroct):
12/31/2Ol I (bolonce sheet dole): Foir volue of option .. P 2,300
3/01l2ol2 (expirolion dote) : Foir volue of option
l(P030 - P.771 x FC 100,000) ................... 3,000 740
Nel.lmpocl on 2Ol2income - loss (decreose)................... P78,680.30

r r2. (b)
Net cosh inflow with option {P80,000 - P2,000)....:................. P78,000
Cosh inflow without option (ot spot rote of P.77) ................ .77.0@
Net increose in cosh inflow P 1,000

113. (b)
lnceplion dote (June I B): Foir volue of coll oplion P r 2,000
Expirotion dote (August 2): Foir volue of coll option:
Volue of Coll Opiion; "in-the-money"
Spot rote:Y80,000,000 / Y93............. P 860,215
Exercise (strike) price: Y80,000.000 / YI00.... BO0,0OO 60,215
Foreign exchonge goin - current eornings P 48,215 (b)
Derivatives as Hedping Instruments in Managing Foreign Currency Exposures 7t5

r r4. (d)
lnceplion dote (Morch I ): Foir volue of coll option. P20,000
Expirotion dote (June l): Foir volue of coll option:
Volue of Coll Option; "out-of-lhe-money''
Spot rote:Y80,000,000 / Yl05 P761,905
Exercise (sirike) price: +80,000,000 / Y100.... 800,000

Foreign exchonge loss - cunent eornings P20,000 (d)

It should be nofed fhot fhe bxercise price is higher lhon fhe morket (spot rote) price,
in which cose, fhere is no volue tor the option. Therefore, option will nat be exercise
which leod to o /oss of P20,000 in exercising the option.

lfems I l5through I l9 Soluflbn Guide loble

Jonuary I June 30 December3l
Spot rote (Morket Price) ........ P 1.15 P 1.18 ? 1.17
.Strike price (Option Price) ,.... P 1.14 P r.l4 P l.t4
Notionol omount (in Boht) ... 1,000,000 r,000,000 r,000,000
lntrinsic volue (if Morket .l0,0002
P
is > Opiion (Strike)......... P 40,000 P 30,000
Time volue**................. P 7,000 4,000 cp
Foir (Totol) volue of Option .. P 17,000r P 44,000 P 30,0004

'{Morkef Price - Oplion Price) x notionot omount

**Foir volue of option less lnlrinsic Volue
tGiven
,(Pl.l5 - Pl.I4) x 1,000,000 bohl = P10,000
3lime hos elopsed, time volue elemenf is zero.
1
(P l.l7 - P l.l 4) x 1,000,000 = P30,000

I15. (o)
On June 30, 201 l:
Foir volue of Coll Option P44,000
lntrinsic Volue: (PI.l8 Spot rote - Pl .14 Exercise price,
lower if coll option) x 1,000,000 boht 40,000

Time Volue ll,00o (o)

l f 6. fcl - since December 31,201I is the date of expirotion, if should be nofed thot time
volue elernenl /ose volue os o Fesulf of'fhe possog e of time, the fime volue decrboses lo
zero ot lhe end of the option becouse no time e,ernenf remoins ot the expiotion point
ond the rnorkef valve of the.option is lhen bosed solely on ifs infrinsic volue. only
inlrinsic volue is recognized which is P30,000 UPl.l7 -Pl.l4) x 1,000,000 bohtl.
7t5 Clmpter l2

117. (d) -ldonsp|rif accountingis used.

Hedging lnstrument /Hedging Tronsoction /Option Conlrocl:
lnception dale lll1l29l l): Foir volue of col option plZ,OOO
Bolonce sheet dote (6/3f/201t!: Foir volue of coll option 44,000
Foreign exchonge goin - equity/OCt P27,OOO
Multiplied by: Number of foreign cunencies sold
{600,000/750,000} 80%
Foreign exchonge goin - eornings................... _I3.L6OO (d)
lfhen llre ocftndhonsoclfon (i.e., lhe import purchose) dtlecte{rniogs or oncelhelorecorled
lrsnssctlon occslr, lhe goin on lhe derivolive (option contrqctThedging instrumentl Es
OCI ilern wiil be reclossified into cungfl eornings. the entry lo reclossify would be os
follows (goin wos credited outright since there is no other occount ovqiloble lefl to be use):
OCI - goin ...........21,600
Foreign cunency goin on opfion controct
(hedging instrument'l 2t.600

There is on underhedge of 250,000 foreign cunencies, no ineffecliveness is recorded in

eomings.

I18. (b) -lP27,w*P2l,6N=P5,400goin);refertoNo.llzforfurthercomputotion.

I19. (c)
lledging lnsfrumenf I Hedging Tronsqction I Option Confrocf;
Foreign exchonge goin - reolized from sole of foreign
cunencies until Expirolion dote (pZ7,OW x 2O%,
No. I l7l ................ P 5,400
He dging lnstrume nt / Hedging lronsoction I Option Controct:
Bolonce sheet dole (6130120l I ) Foir volue of coil option P44,W
Expirolion dote (12/31 l20l I):
Volue of coll option: "in-lhe-monet''
Spol rote... I7
Exercise (strike) price ......... I4

P .03
Multiplied by: No. of foreign currencies r,000,000 30,000
Foreign exchonge loss - cunent eornings .. PI4,000
Nel foreign exchonge loss - cunent eornings P 8,600 {c)
 krivatives as lledging h$tru,Ercnts .in Menaging.Foreign Currency Exlosures , .. l7
-7

lia*rg 120 ffuough t26 Solulfon Guide loble

June 1 30 JulY 3l
June $eptembel I

Spot rote (Morket Price) ..... P0.s3 P0.552 P0.57 P0.575

Strike price (Option Price) .. P0.s5 PC55 , P0.55 P0.55
lnlnnsjc volue (if Market
is > Oplion (Slrike)*..... P O F 200 P2,000 P2,500
Time volue** ......................... 9m 1,150 400 100
Feir (Totsl) vqlue of OPtion P900 P1,350 ?2,1Q F2,600
+lMqrket Fnce - aption Price) x notionol omount
**foir votue at option Jess lnfrinsic Volue

l20.(d)-splilAccoUntingisused.Relertolhesolulionguidetobleforfurlheroncdysis
lntrinsrb votue: p200 --pO = pZOO cumulolive goin. Chsnges in inlrinsic volue 6e recorded
direcfly in ACt, when llre ocluol lronsocfion olfecfs eornings, fhe gsin (or lossl on
tne oplion controct will be reclossified into current eqrnings'
Time rclue: pl.lso - p900 = P250 goin. Chonges in time volue sre recor&d directly in
eornings.

l2l. {c) - Split Accounting is used. Refer to the solution guide iqble for further
onolysis
tntriniic volue: P2,000 - P0 = P2,000 cumulotive goin - OCI'
Time volue: P400 - Pl,l50 = P/50 loss - eornings.
1"2. (d) - Split Accounting is used. Refer to the solution guide toble for further
onotysis
lntriniic volue: P2,500 - P0 = P2,500 cumulotive goin - OCl.
fime volue: Pl00 - 400 = P300 loss - eornings.
'--'
r23. (d)
i,ebternber 1 spot rote (tronsociion dote): P.575 x FC 103,0@ . P59,22t
ncioilionot prcitessing bosts ...........'.,......................-.....-....."..'..... 4,00q

)
121. (c)
September I spot rote (konsoctlon dote): P'575 x FC 103,000. P59,Zzs
Addiikrnol processing costs .......... .................:........' ,20,0w
lnventory costs .......... .............'.:.... P79,?25
Less: OCi- gqin on option controct (hedging instrvment) -
crediibolonce e500
Cost of So|es.......... H!'275=(cl

,l:
ril
r 25. (b)
Soles price of inventory P95.000
Cost of soles - row moteriols { se,225)
Cost of soles - processing costs { 20,000)
Gross profit Pt5,775
Adjustment to cost of soles due to chonge in the intrinsic
volue of the oplion 2,500
Adjusted gross profit (b)
|j9,24
126. (c)
Adjusted gross profit (refer lo No. 125) ..!i..........r.... P18,275
Loss on hedged excluded from ossessment of hedge
effectiveness (chonges in time volue element: pl@- p900;
refer to the solution guide toble for further onolysis) ( 100)
Net income effecl ll7,47t'lcl
127. (b)
The eosiest woy to solve this problem to prepore journol entries for the
oplion cosh flow hedge of o forecosted tronsoction. The journol entries
ore os follows:

| lt tt:
Foreign Currency Option ................. :.. 1,500
Cosh 1,500

(The oplion hos no intrinsic volue on this dote since the oplion is "ot-lhe-money', (i.e.,
the oplion/strike Price of P.40 is the some wilh the Morket/Spot price of p.y'01

12t31lll
Foreign Exchonge Loss from Option Controctl
Oplion Expense
Foreign Cunency Option 400

(The oplion hos no intrinsic volue ol 12131 lll so the enlire chonge in foir volue is due lo
o chonge in time volue; .P 1,500 - P I .100 = P400 decreose in lime volue. The decreose in
lime volue of the option is recognized os on expense in net income.)

Oplion Expense/Foreign Exchonge Loss decreoses net income by p400. '

li
Derivativei es Hedging Instrunents in Managing Foreigtl Currency Expbsures 719

128. (c)
Cost of goods sold: (Spot/Morket price on dole of lronsoclion
of P.4l x 200,000 foreign currencies)
-
Less: lnlrinsic Volue
lzititnt poionce sheei dote): Foir volue of oplion
Out-of-the,money (Option/Slrike price of P.40 is
,. greoter thon s,Pol/morkel price of P.38)-.... P 0
3/01112 (expirotion dole) : Foir volue of opiion
t(P0.4i - P.4O) x FC 20O,O0O) ................. 2,OOO 2,000

Adjustedcostofgoodssold.......:.'.....:...'...............
Add: Chonge in Time Volue:
12/31/ll: (bolonce sheet dote): Foir volue of oplion. Pl,l00 :

2/Ol/12: (expirotion dole): Foir volue of option

"ln-the-money" (|he difference in lhe option/''
strike priie whici'r is P.4O ogoinst lhe morkei/spot
price is due lo intrinsic volue qnd no time volue
should be recognized)........'...'.. 0*
Foreign Exchonge Loss/Option expense...'.:.....-......-'..... I.100
.
Nelimpoc|on20l2income.loss(decreose)....'.....-|g!-o9
*lf lhe foir volue of option is nol estoblished on the doie of expirotion, it is oulomoticolly
ossume thot ihe difference in MP ogoinst OP {if MP is greoler ihon OP} otlributoble lo
. lnlrinsic Vqlue, leoving the Time Volue ol zero
omounl since it is okeody expired.
t2e. (ol
Foir
Moket/ Option Volue
Spot Rote Price of OPtion
Jvly24
Oct.24 P2.13 P2.17 0 out-of-the-money
Option Expenselloss on
forword controct... P4,000

r30. (d)
Foir,
Morket/ Option Volue
Spot,Rote Price of Option
Jonuory I 7 ........................ P4.34 P4.34 P5,000 olthe-money
April l7 ................. P4.26 ?4.34 0 out-of-the-money
Option Expense/Loss on
forword controct...-r---------]- P5,000
ffcnac I3t fuuog& tJ6sotstba Gsid6-tA$tr--
Jonuary I June30 Decenrber3l
Spot rote {Morket Price} ........ p 1.20 P 1.12 P l.l5
Strike price (Option Frice) ..... p l.l9 P t.l9 P l.l9
Notio*ol cmount (in Boht) ... 1,m0,000 r,000,000 1.000,000
lntrinsic volue (if Mcrket
is < Option (Strike)-........ p 0 P 70,000 P 40,0m
Time vqlue** ................ p 16,000 I l,0m
Foir (Totol) volue of Option .. p t 6,000|
0p
P 81,000 F 40,0002
t(Option Price - Morket Price) x notionol omount
**Fair vqlue of option less lnlrinsic Volue
rGiven
'z(P'|.'19 - Pl.l5) x 1,000,000 bohf = 14O,OOO
3firne hos elcrpsed, firne vglue
e,ernent is zero.

r3r. (b)
Ihis opfion tb on -oul.of-the-money" becouse the Pl.lg strike price ffhe sellrng pnce| is
&algw lfte Pl.r0 *ot rsle on l/l/ll. Thus, lhe enfire pl6,gw ll lime vglue. -

r32. (b)
He dging lronsoction I Option Confra ct:
lnception dote {l l1l2O1l): Foir votue of put option ...... F16,0@
Bolonce sheet dote {6/30/20r r }: Foir vorue of put oprion 9r,000
Foreign exchonge goin - OCt
16g@{br
133. (o)
frO Argy - P65,OOO gotn rnusf be defened becouse no export soles hove occuned in fhe
finf six monfhs.

134. (o)
M Enlry - F65,0a0 gain must be deferred becouse no expott soles hove €cuned in fhe
fi:f sx monlhs.
135. (c)
Foreign exchonge goin - OCI............ p(5,000 ..
Multipled by: % occuned in lhe first six months........................ M
Arrsml to be reclossified os defened goin to cunent eornings ... P39,000 (cl
r36. (b)
When lfie aclual lronsEcllon (i.e., lhe import purchase) offecf ecrn&ngn or once lhe
forecosled lronsocfion occurs. lhe gotn
lh" dertuotive (option ,oitrictiiuaeiig
instrumentl os oCl item will be reclosrrife!.9lrnro grrrenl The enlry ro-reirJssr!
would be cs fol&rws (goin wos credited o'utright s,nce there"*oangtr.
is nJofher occount ovortotile
left to be use refer to no. l24l:
Derivalives as Hedging htstruments in Managing Foreign Currency Exposures 721

Dlsposilion of the foreign exchdnEe gain d€ferred on June gl, Stl uilder
lhree ossumplions:
Zero Actual Export Sobs for 201I
OC,- goin.......... 65,M
Foreign curency goin on opfion controct
{hedginginstrvment) ........... 65,m0

l,O0O,OOO Bohl Aclugl Export Soles for 201I (oll in l2ll l)

OCt.- goin ...65,W
Foreign cunency gain on option controct
(hedginginstrumentJ 65,0W

1,000,000 Bohl of Acluol Export Ssles for 2011(60%in first 6 momths)

OCI-goin (P65,000x40fd.......... .....26,W
controcf
Foreign cunency goin on option
(hedginginstrument) 26'WA

Iterns 137 through 140 SolulionGuide loble:

Jonuary I Morch 3l June 30
Spot rote {Morket Price} ........ FC 1.40 FC r.45 FC 1.50
Slrike price (Opiion Price) ..... FC 1.43
.|,400,000
FC t.43 FC 1.43
Notionol omount (in FC) ...... 1,400,@0 1,400,000
lntrinsic volue (if Morket
is < Option (Slrike)*........ 0 P P13,504' P 45,6883
Time volue 32,000 P 16,496? Cr
Foir (Totol) volue of Opiion 32,000 .. P P 30.000 P 45,6883
.(Option Price Market Pice) x nofionol omount {nofe: expressing it in o direcl quolotion tor
-
Jonuory l,lhe
morket/Spot Price af PllFC 1.40 = P.7l is > the Sfnke Price of PIIFC 1.43 =
P.70, no there's no infrinsic volue ot lhe incepfion dofe.f
'*Foir volue of option ,ess ,nfrinsic Volue
'{Expressed in lndirect Quotofion, Spot Price Strike P/ice, so tnlrinsic vo,ue rnusl be:
<
(rC t,400,000
,F30,400
I t.431 - (1,400,000 / 1.45) = Pt3.504
- Pt3,504)
3(Expressed in lndirect quotation) Spol Price < Strike Price, so intrinsic volue msuf be:
(FC t,400,000 / 1.43) - (t,400,000 / 1.50) = Pt3,S04
rlime hos elopsed, fime volue elemenf is zero.

137. (o I - Split Accounting is used. Refer lo the solution guide toble lor furlher onotysis
* P0 = Pr3,504 cumulotive goin. Chonges in inlnhsic vdlue ore
lntrinsic value: P13,540
recorded dhectly in OC| when lhe sctuol lronsocfion qlfecfr eonlngr, lhe goin (or
lossj on the optian conlrocf will be rec,ossified into cunent eornings.
Time volue: P32.000 - ?16,496 = Pl5,5O4 loss. Chonges in time volue are recor&d directly
in eornings.
722 .. Chaptert2

138. (O I - Splil Accounting is used. Refer lo ihe solulion gulde toble for furlher onolysis
lnlrinsic volue: P45,688 - P0 = P45,688 cumulolive goin - OCt.
Time volue: P16,496 - P0 = P15,496 loss - eornings.

139. (b) - should be bosed on FC 1,300,000 octuot sotes.

Spot rote on June 30: FC 1,300,000/pl .50 ..............,................. .. p866,667
Add: to reflecf lhe effective component of the hedge due io
chonges.in intrinsic volue os the hedged tronsoction
offectseornings(P45,6BBxl,300,000/t,aoo,ooo)
Resportoble soles on June 30............... p909,092 (b)

r40, (b)
Chonge in lntrinsic Volue:,[P45,588 (refer lo No. 138] cumuloiive goin - (p45,688 x 1,300.000/
1.400,0001, refer lo No. l37l = P3,263.
Ihe excess of cumulotive thonge (goin for No. .37) in foir volue of the hedge over lhe
cumulotive chonge in expecfed fulure cosh flows on the hedged tronsocfion is fhe
ineffectiveness fo be reported to income sfofemenf.

r4r. (b)
Noles:
L The spof rote ond the forvvordrote on December l,2Oll are the sorne, so lheres
no discouf or premiurn.
2. Derivotive confrocfs ossocioled with foreign-currency denominoted ossefs ond
liobt/tfies are explicitly excluded from the hedge occounting proveions of pAS No.
39. Howev,er, by occounting for the derivative os.o speculotion, ond recognizing
ony exchange goins or losses immediotety, lhe journol enfries ore exoctly .lhe
some os for a loir volue hedg.e,

l2l1 /2O11 : Spot roie (P I /40 woh) . P 0.025

121311201l: Spot rote (Pll50 won) 0.020
Forex loss per unit P 0.005
Multiplied by: Number of foreign currencies 100,000
Foreign exchonge loss due to soles of merchondise P s00 (b)

ta2. @l
12/1/2011: Cunent (Orjg!ng!) Forword Rote (pl/40won) ....... P 0.025
,12131/2Ol l: Spot rote (Pl /50 won) 0.020
Forex goin per unit P 0.005
Multipled by: Number of foreign currencies r00,000
Foreign exchonge goin due to future controct
_l__!00 (c)
 ,eign Currency Exposures. 723

143. (o)
Foreign exchonge loss due to soles of merchondise '.."""""' P 500
Foreign exchonge goin due to future controct s00

Net foreign exchonge goin or loss/nei incorne effect -E-----Q. to)

I 44" (cJ - A nolionol omounl, may be expressed in fhe nvmber of cunency units,
inbreS, bushels, pounds or other unifs specif ied in lhe finoncial instrument'
Thereifore, the P25,000 notionol volue is comp uted os 20,A00,000 won lB won'

r 4s. (b)
.tcinuoryl, 201 1 PV of Won Receivoble:20,000,000
won / 800 = P25O00 x '82645 (PV of on onnuity of Pl ot
lo%tor2Yeors) P20,661
Add: lnterestP.evenue (P20,561 xl}%x I yeor) '."',""""""""'l 2,066

Volue of Won Receivoble, December 31, 20] 1 ........""."""""' P22'727 lbl

la5.
' (o)
\ il tZOt l: Originol foword rote: won 20,000,000 / 800 Won " P25.000
3rc1t2Cl l: Cunenl (remoining) forword rote:
Won 20,000,000 /79O won .'.......'. 25,316
' Forex loss on hedging inslrumeni........."'.......: P 3i6
Less: Discount - p5l 6x10% x 1 yeor (for the yeor 20121
32

PV of futures coniroct, l2t3l l2}ll (o liobility) '............""""""' P 2841 (o)

Or, slterndlively hhe compulolion of presenl value moy olso be presenled os:
Foreign eichonge loss ....".".... . 316 P
oiviO6O by: tl00?. + 1o%remoining one yeorl
l '10

PV of futures coniroct, 1213112011 ..................

!--zgq
* P4 discrepancy due to rounding off.

1a7. lcl
l ll l2}ll : Originol foword rote: won
20,000,000 / 800 won " P25,000
12/3112012: Spot rqte: Won 20,000,000/830 won 24,096

Foir volue of futures controct on Jonuory l, 20.l3 (on osset) .

-ts-!94 tc)