The Following Data Is Provided for the Fair Value of a Share

question 28

Multiple Choice

The following data is provided for the fair value of a share portfolio,and the fair value of a forward contract taken out on 1 July 2007 to 'hedge' movements in the fair value of the shares.Assume the hedge was highly effective at inception of the hedge. Which of the following statements is true?

• A) It is not an effective hedge as there was a difference of $10,000,000 between the fair values of the shares and the forward contract at inception.
• B) It is not an effective hedge as a forward contract cannot be used as a hedging instrument.
• C) It is an effective hedge as the movement in the fair value of the hedging instrument between 1 July 2007 and 30 June 2010 offset movements in fair value of the shares in the same period, which is within the 80/125 per cent hedge effectiveness range.
• D) It is an effective hedge as the movements in the fair value of the hedging instrument offset movements in fair value of the shares and stayed within the 80/125 per cent hedge effectiveness range throughout the period to 30 June 2010.
• E) It is not an effective hedge as the movements in the fair value of the hedging instrument failed to offset movements in the fair value of the shares and stay within the 80/125 per cent hedge effectiveness range throughout the period to 30 June 2010.

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Definitions:

Investing Activities

Transactions involving the purchase or sale of long-term assets and other investments not considered cash equivalents, usually reflected in the cash flow statement of a company.

Cash Dividends

Payments made by a corporation to its shareholders, usually in the form of cash, out of its profits or reserves.

Payable

Refers to an amount of money that a company owes to its creditors or suppliers, to be paid at a later date.

Accounts Receivable

Money owed to a business by its customers for goods or services delivered on credit.