Credit default swaps are credit derivatives that:

a) Present high levels of risk and should only be used by the wealthy.
b) Allow lenders to insure themselves against the risk that a borrower will default.
c) Should only be used by people seeking high returns from low risk.
d) Do not require collateral to be posted by either the buyer or the seller of the insurance.

The disadvantage of swaps is that they

a) lack liquidity.
b) are difficult to arrange for a counterparty.
c) suffer from default risk.
d) all of the above.

On January 1, 2021, S Company borrowed P5,000,000 from a bank at a variable rate of interest
for 4 years. Interest will be paid annually to the bank on December 31, 2024. Under the
agreement, the market rate of interest every January 1 resets the variable rate for that period
and the amount of interest is to be paid on December 31. In conjunction with the loan, S
Company entered into a “receive variable, pay fixed” interest rate swap agreement with another
bank speculator. The interest rate swap agreement was designated as a cash flow hedge. The
market rates of interest are: January 1, 2021 10% January 1, 2022 14% January 1, 2023 12%
January 1, 2024 11% The present value of an ordinary annuity of 1 is 2.32 at 14% for three
periods, 1.69 at 12% for two periods and 0.90 at 11% for one period. What is the “notional” of
the interest rate swap agreement?
a) P5,000,000
b) P2,000,000
c) P2,500,000
d) P500,000

In exchange for the rights inherent in an option contract, the owner of the option typically pays a
price
a) Only when the call option is exercised.
b) Only when the put option is exercised.
c) When either a call option or a put option is exercised.
d) At the time the option is received, regardless of whether the option is exercised or not.

L Company produces colorful 100% cotton shirts and the entity needs 50,000 kilos of raw
materials in the production process. On December 1, 2021, the entity purchased a call option as
a cash flow hedge to buy 50,000 kilos on July 1, 2022.
The option strike price is P100 per kilo. The entity paid P50,000 for the call option. This
derivative option contract means that if the market price is higher than P100, the entity can
exercise the option and buy the asset at the strike option price of P100. If the market price is
lower than P100, the entity can throw away the option and buy the asset at the cheaper price.
The market price per kilo is P110 on December 31, 2021 and P115 on July 1, 2022. What is the
cost of purchases on July 1, 2022?
a) P5,050,000
b) P5,000,000
c) P5,750,000
d) P5,300,000

If a cannery wanted to lock in the price that they would pay for peaches in August four months
before harvest (in April of the same year), they would be most likely to enter into which kind of
agreement?
a) Fixed commodities contract
b) Interest rate swap
c) Option
d) Futures contract

T Company received a two-year variable interest rate loan of P5,000,000 on January 1, 2021.
The interest on the loan is payable on December 31 of each year and the principal is to be
repaid on December 31, 2022. On January 1, 2021, T Company entered into a “receive
variable, pay fixed” interest rate swap agreement with a speculator bank designated as a cash
flow hedge. The interest rate for 2021 is the prevailing interest rate of 10% and the rate in 2021
is equal to the prevailing rate on January 1, 2021. The market rate of interest on January 1,
2022 is 7% and the present value of 1 at 7% for one period is .935. What amount should be
reported by T Company on December 31, 2021 as “interest rate swap payable”?
a) P150,000
b) P140,250
c) P100,000
d) P0

On January 1, 2021, J Company borrowed P5,000,000 from a bank at a variable rate of interest
for 2 years. Interest will be paid annually to the bank on December 31 and the principal is due
on December 31, 2022. Under the agreement, the market rate of interest every January 1 resets
the variable rate for that period and the amount of interest to be paid on December 31. In
conjunction with the loan, the entity entered into a “receive variable, pay fixed” interest rate
swap agreement with another bank speculator as a cash flow hedge. The market rates of
interest are 10% on January 1, 2021 and 12% on January 1, 2022. The “underlying” fixed
interest rate is 10%. The PV of 1 at 10% for one period is .91 and the PV of 1 at 12% for one
period is .89. What amount should be reported as interest expense for 2022?
a) 600,000
b) 500,000
c) 511,000
 d) 700,000

swap is a contract where parties

a) agree to the future price of a currency exchange.
b) exchange flows of payments.
c) exchange future cash flows for past cash flows.
d) have the right to buy an underlying asset at a fixed price.

The purpose of derivatives is to:

a) Increase the risk so the return is larger.
b) Eliminate risk for both parties in the transaction.
c) Postpone the risk for both parties in the transaction.
d) Transfer the risk from one person to another.

On January 1, 2021, G Company borrowed P5,000,000 from a bank at a variable rate of interest
for 4 years. Interest will be paid annually to the bank on December 31 and the principal is due
on December 31, 2024. Under the agreement, the market rate of interest every January 1 resets
the variable rate for that period and the amount to be paid on December 31. In conjunction with
the loan, the entity entered into a “receive variable, pay fixed” interest rate swap agreement with
another bank speculator as a cash flow hedge. The market rates of interest are 6% on January
1, 2021, 10% on January 1, 2022 and 8% on January 1, 2023. The present value of an ordinary
annuity of 1 at 10% for three periods is 2.49 and the present value of an ordinary annuity of 1 at
8% for two periods is 1.78. What is the derivative asset or liability on December 31, 2022?
a) P100,000 asset
b) P100,000 liability
c) P178,000 asset
d) P178,000 liability

On January 1, 2021, Pasay Company entered into a two-year, P3,000,000 variable interest rate
loan at the prevailing rate of 12%. In 2021, the interest rate is equal to the prevailing interest
rate at the beginning of the year. The principal loan is payable on December 31, 2022 and the
interest is payable on December 31 of each year. On January 1, 2021, Pasay Company entered
into a “receive variable, pay fixed” interest swap agreement with a speculator bank designated
as a cash flow hedge. The prevailing interest rate on January 1, 2022 is 14% and the present
value of 1 at 14% for one period is .877. What amount should be reported as “interest rate swap
receivable” on December 31, 2021?
a) P60,000
b) P52,620
c) P30,000
d) P0