The document discusses the use of derivatives, such as forward contracts, options, and futures, as hedging instruments to manage foreign currency exposures. It covers the types of derivatives used for hedging, including forward-based and option-based derivatives. The document also discusses accounting for foreign currency derivatives and hedging activities under PAS 39 and PFRS 9, focusing on fair value, cash flow, and net investment hedges. Multiple choice questions at the end assess understanding of how to account for foreign exchange contracts used as hedges.
The document discusses the use of derivatives, such as forward contracts, options, and futures, as hedging instruments to manage foreign currency exposures. It covers the types of derivatives used for hedging, including forward-based and option-based derivatives. The document also discusses accounting for foreign currency derivatives and hedging activities under PAS 39 and PFRS 9, focusing on fair value, cash flow, and net investment hedges. Multiple choice questions at the end assess understanding of how to account for foreign exchange contracts used as hedges.
The document discusses the use of derivatives, such as forward contracts, options, and futures, as hedging instruments to manage foreign currency exposures. It covers the types of derivatives used for hedging, including forward-based and option-based derivatives. The document also discusses accounting for foreign currency derivatives and hedging activities under PAS 39 and PFRS 9, focusing on fair value, cash flow, and net investment hedges. Multiple choice questions at the end assess understanding of how to account for foreign exchange contracts used as hedges.
The document discusses the use of derivatives, such as forward contracts, options, and futures, as hedging instruments to manage foreign currency exposures. It covers the types of derivatives used for hedging, including forward-based and option-based derivatives. The document also discusses accounting for foreign currency derivatives and hedging activities under PAS 39 and PFRS 9, focusing on fair value, cash flow, and net investment hedges. Multiple choice questions at the end assess understanding of how to account for foreign exchange contracts used as hedges.
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CHAPTER 11 - DERIVATIVES AS HEDGING INSTRUMENT IN MANAGING FOREIGN CURRENCY
EXPOSURES
I. INTRODUCTION
TYPES OF FINANCIAL INSTRUMENTS
1. Foreign currency forward contracts
2. Foreign currency options
3. Foreign currency futures and
4. Foreign currency swaps
3 TYPES OF THE DERIVATIVE FINANCIAL INSTRUMENTS FOR FOREIGN CURRENCY
1. FORWARD CONTRACTS
2. OPTIONS
3. FUTURES - commonly used to hedge foreign currency exposure.
II. TYPES OF DERIVATIVES
A. TYPICAL EXAMPLES
1. Futures and forwards
2. Swap
3. Option contracts
B. 2 GENERAL CATEGORIES
1. Option-based derivatives - "one-sided exposures". Only downside risk on the hedged
item is counterbalanced.
- Examples: Option contracts, Interest rate caps and
interest rate floors.
2. Forward-based derivatives - "two-sided exposure". The downside risk and the upside potential on the hedged item are counterbalanced.
- Examples: Forwards, Futures and Swaps.
III. ACCOUNTING FOR FOREIGN CURRENCY DERIVATIVES AND HEDGING ACTIVITIES
A. HEDGING OPERATION
- Purchase or sale of foreign currency contract to offset the risk.
- Forward contracts - usual way of avoiding the risk
B. 2 CRITERIA MUST BE MET FOR DERIVATIVES TO QUALIFY AS HEDGING INSTRUMENTS
1. Sufficient documentation
2. The hegde must be highly effective (80%-125%)
IV. ACCOUNTING FOR HEDGES - PFRS 9
A. FAIR VALUE HEGDE
B. CASH FLOW HEDGE
C. HEDGE ACCOUNTING
D. NET INVESTMENT HEDGE
V. WHAT DO PAS 39 AND PFRS 9 HAVE IN COMMON?
A. SEVERAL MAJOR POINTS REMAINED ALMOST THE SAME:
1. Optional
2. Terminology
3. Hedge documentation
4. Categories of hedges
5. Hedge ineffeciveness
6. No written options
VI. DIFFERENCES IN HEDG ACCOUNTING BEWEEN PAS 39 AND PFRS 9:
A. MOST IMPORTANT CHANGES
1. What can be used as a hedging instrument
2. What can be your heded item
3. Testing hedge effectiveness
4. Rebalancing
5. Discontinuing hedge accounting
6. Other differences
B. ASSESSING HEDGE EFFECTIVE UNDER PFRS 9
C. SPLIT ACCOUNTING IN ASSESSING/MEASURING HEDGE EFFECTIVENESS
VII. BASIC ACCOUNTING ISSUE INVOLVING HEDGING AND HEDGING ACCOUNTING
A. HEDGING VS. HEDGE ACCOUNTING
B. PFRS 9 IDENTIFIES THREE TYPES OF HEDGE
1. Fair value hedge
2. Cash flow hedge
3. Hedge of a ne investment in foreign operations.
C. FORWARD CONTRACTS - FOREIGN CURRENCY FORWARD CONRACTS
1. Specified future date (w/n 12 months)
2. Exchange rate - Forward rate
D. THE USE OF FORWARD CONTRACTS
1. HEGDE
a. Forward contracts used as a hedge a foreign currency transaction
b. Forward contracts used as a hedge of an unrecognised firm commitment
c. Forward contracts used as a hedge of foreign-currency-denominated
"forecast" transaction (a cash flow hedge).
d. Forward contracts used as a hedge of a net investment in foreign operations.
2. SPECULATION 3. THE NOTIONAL Amount - The total amount of the asset or liability that underlies the derivative contract.
MULTIPLE CHOICE PROBLEMS
Forward contracts
1. Foreign exchange gain or loss due to hedged item amounted to:
2. Foreign exchange gain or loss due to hedging instrument - forward contract
HEDGING an Exposed liability - with premium added ("Undesignated hedges" or hedge does not require hedge accounting)
3. What amount will aljo Lee disclose as the fair value of the forward contract?
4. What amount will aljon Lee fair value of te forward contract on January 15?
5. What was the net impact on aljons Income in 2018 as the result of this hedge?
6. What is the fair value of the forward contract?
7. The Nominal value of the forward contract?
8. What is the notional value of the forward contract?
9. At what amount should inventory be reported?
10. At what amount, in pesos, does the merchandise appear on the company's march 15 BS?
11. Which statement is true? (The forward contract does not qualify as a hedge)
12. Which of the following is included in Joseph's balance sheet for forward contract?
13. The entries on December 31 includes ( Debit to Foreign currency receivable from exchange broker 6,000
14. Using no. 13 the entries on January 30 include
15. Using no. 13 the entries on January 30 include
16. Using no. 13 the entries on January 30 include
WITH PRESENT VALUE: HEDGING AN EXPOSED LIABILITY
17. The foreign exchange gain or loss on hedging instrument (forward contract) on June 30 amounted to:
18. The Nominal value of the forward contract on june 30
19. The fair value of the forward contract on june 30
20. The net income effect is June 30
21. The foreign exchange gain deu to heading instruments (forward contract) on August 1
22. In the journal entry to record the establishment of a forward exchange contract, at what amount should the forward contract account be recorded on December 1?
HEDGING AN EXPOSED ASSET - "UNDERSIGNATED HEDGES" OR HEDGE DOES NO REQUIRE HEDGE
ACCOUNTING
23. What was the net impact on income in 2017 as result of this hedge?
24. The fair value of the forward contract on June 30 2017?
25. The fair value of the forward contract on August 2 2017?
26. At what amount would Camco record the forward contract on June 1?
27. How much foreign exchange gain or loss should it report on its 20x7 income statement with regard to this transaction?
28. Using no. 25. What is the net impact on its net income in 20x 7 resulting from a fluctuation in the value of the foreign currencies?
29. What amount will cahoon pay to, or receive from, the bank (round to the nearest peso)
30. What amount will cahoon disclose as the fair value of the forward contract on December?
HEDGING AN UNRECOGNIZED FOREIGN CURRENCY FIRM PURCHASE COMMITMENT - HEDGE
