Compensating Balances Are a Restriction on the Use of a Company's

question 164

Multiple Choice

Compensating balances are a restriction on the use of a company's cash and should be

• A) reported as a current asset.
• B) reported as a noncurrent asset.
• C) disclosed in the notes to the financial statements.
• D) reported as a reduction of cash.

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Definitions:

Basis Risk

The risk that the price of a hedge and the asset being hedged will not move in perfect correlation.

Call Option

A financial arrangement granting the buyer the freedom, but not the duty, to acquire an asset such as a stock, bond, commodity, at a set price within an established timeframe.

Credit Default Swap

A financial derivative that allows an investor to swap or offset credit risk with another party.

Cross Hedging

A risk management strategy that involves hedging a position in one asset by taking a position in another asset with correlated price movements.