To Account for a Forward Contract Cash Flow Hedge of a Foreign

question 77

Multiple Choice

To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following?

• A) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability2. Recognize option as an asset (purchase price is fair value)
• B) 1. No entry related to the firm commitment (zero value)2. No entry related to forward contract (zero fair value)
• C) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability2. No entry related to forward contract (zero fair value)
• D) 1. Recognize the transaction (sale or purchase).2. Recognize the option as a liability.
• E) 1. None. No journal entry is required.

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Definitions:

Maximum Loss

The greatest amount of loss an investor or trader is potentially exposed to in an investment or trade.

Call Premium

The amount a call option buyer pays to the seller over and above the option's intrinsic value, which reflects the time value or speculative premium of the option.

Put Premium

Put premium refers to the price that an investor must pay to purchase a put option, which grants the right to sell a specified quantity of a security at a set strike price up to the expiration date.

Callable Bond

A bond that the issuer may repurchase at a given call price in some specified period.