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1.
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A derivative must contain which attributes?
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  It has an underlying interest rate, security or commodity price, foreign exchange rate, or index with one or more notional amounts
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It has no initial cash outlay
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The terms permit net settlement between counterparties.
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All of the above
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2.
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Derivatives can be either on the balance sheet or off the balance sheet. They include
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Futures.
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Bonds.
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Mortgage backed securities.
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All of the above.
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3.
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Which of the following is the risk that arises from the possibility that future changes in market prices may make a financial instrument less valuable or more onerous?
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Market risk.
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Correlation risk.
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Systematic risk.
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Valuation risk.
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4.
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Which of the following risks is(are) inherent in an interest-rate swap agreement: I) The risk of exchanging a lower interest rate for a higher interest rate; or II) The risk of nonperformance by the counterparty to the Agreement.
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I only.
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II only.
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Both I and II.
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Neither I nor II.
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5.
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The FASB's definition of derivatives excludes:
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Forward contracts
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Swaps
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Certain insurance contracts
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All of the above
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6.
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A company enters into derivative contracts for ___________ purposes.
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Trading
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Hedging
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Timing
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A and B only
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7.
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The accounting for fair value hedges records the derivative at its
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Amortized cost.
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Carrying value.
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Fair value.
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Historical cost.
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8.
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All of the following statements regarding accounting for derivatives are correct EXCEPT that
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They should be recognized in the financial statements as assets and liabilities.
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They should be reported at fair value.
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Gains and losses resulting from speculation should be deferred.
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Gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
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9.
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An option to convert a convertible bond into shares of common stock is a(n)
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Embedded derivative.
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Host security.
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Hybrid security.
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Fair value hedge.
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10.
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Disclosure of information about significant concentrations of credit risk is required for
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Most financial instruments.
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Financial instruments with off-balance-sheet credit risk only.
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Financial instruments with off-balance-sheet market risk only.
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Financial instruments with off-balance-sheet risk of accounting loss only.
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11.
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Gains or losses on cash flow hedges are
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Ignored completely.
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Recorded in equity, as part of other comprehensive income.
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Reported directly in net income.
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Reported directly in retained earnings.
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12.
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To the extent the hedge is effective, a loss arising from the decrease in fair value of a derivative is included in current earnings if the derivative qualifies and is designated as a
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Fair-Value hedge
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Cash-Flow hedge
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Both a Fair-Value hedge and Cash-Flow hedge
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Neither a Fair-Value hedge nor a Cash-Flow hedge
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13.
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Which of the following transactions may NOT be eligible for cash flow hedge treatment?
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A hedge of future cash interest outflows associated with floating rate debt.
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A hedge of a forecasted future purchase of a commodity to protect against rising prices.
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A hedge of an exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment.
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A hedge to lock in the future cost of borrowing for the company.
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14.
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Under IFRS, companies record unrealized holding gains or losses on cash flow hedges as:
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Current income or loss.
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Adjustments to the value of the hedged item.
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Other comprehensive income.
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Retained earnings.
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15.
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All of the following are requirements for disclosures related to financial instruments EXCEPT
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Disclosing the fair value and related carrying value of the instruments.
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Distinguishing between financial instruments held or issued for purposes other than trading.
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Combining or netting the fair value of separate financial instruments.
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Displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.
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16.
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For a hedging relationship to qualify as “highly effective,” the change in fair value or cash flows of the hedge must fall between _________ and ____________ of the opposite change in fair value or cash flows of the exposure that is hedged.
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50%, 100%.
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80%, 125%.
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0%, 100%.
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75%, 100%.
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17.
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A highly-effective hedge of an existing asset or liability that is reported on the balance sheet would be recorded using
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Modified Cash Basis Accounting.
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Critical Term Hedge Analysis.
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Fair Value Hedge.
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Hedge of Net Investment in Foreign Subsidiary.
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18.
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A fair value hedge differs from a cash flow hedge because a fair value hedge
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Cannot be used for firm purchase or sales commitments.
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Is not recorded unless it is a highly-effective hedge.
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Records gains or losses in the value of the derivative directly to earnings of the company in the period of change.
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Defers the gains or losses in the value of the derivative using Other Comprehensive Income.
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19.
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When a cash flow hedge is appropriate, the effective portion of the gain or loss on the derivative is
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Recorded in equity as part of other comprehensive income.
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Recognized immediately at the time the agreement is made.
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Recognized over time, amortized over the period of the agreement.
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Recognized over time, offset by the fluctuation in the value of the hedged asset or liability.
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20.
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When preparing their year-end financial statements, the Warner Company includes a footnote regarding their hedging activities during the year. Which of the following is NOT required to be disclosed?
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How hedge effectiveness is determined and assessed
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The specific types of risks being hedged, and how they are being hedged
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Alternative hedging options declined
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The net gain or loss reported for the period for fair value hedges and where in the financial statements it is reported
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