Investment Quiz: 12 Questions Part 7

Explanation
The fair value of the derivative asset on December 31, 2010 is 400,000. This is because the market price of deluxe fish on March 1, 2010 was .93, which is less than the agreed price of P50 per kilo in the forward contract. As a result, Chocolate Company will pay the difference to the bank. Since the market price is lower than the agreed price, the derivative asset is considered valuable and is recorded as a 400,000 asset on December 31, 2010.

Explanation
The notional value of the forward contract is the agreed upon amount of the underlying asset that will be bought or sold in the future. In this case, the Seaman Company entered into a forward contract to purchase 8,000 kilos of Australian lobster on January 1, 2011. The price of the lobster was set at P9,600,000. Therefore, the notional value of the forward contract is P9,600,000.

Explanation
The derivative asset on December 31, 2009 is 2,184,000. This is because the company entered into a forward contract to purchase 8,000 kilos of Australian lobster on January 1, 2011 at a fixed price of P9,600,000. However, the price of lobster dropped to P1,500 per kilo on December 31, 2009. Therefore, the company has a derivative asset of 2,184,000, which represents the difference between the contracted price and the market price on that date.

Explanation
The derivative liability on December 31, 2010 is 1,600,000 because the forward contract was entered into to hedge against the fluctuation in the price of Australian lobster. The contract was for the purchase of 8,000 kilos of lobster at a price of P9,600,000. However, the price of lobster decreased to P1,000 per kilo on December 31, 2010. As a result, the company would need to pay less to fulfill the contract on January 1, 2011, resulting in a liability of 1,600,000.

Explanation
The Indian Company entered into a futures contract to buy soy beans at a fixed price of P150 per kilo. The market price on December 31, 2009 and January 1, 2010 is P160 per kilo. Since the market price is higher than the fixed price, the Indian Company has a derivative asset because it has the right to buy soy beans at a lower price. The derivative asset is calculated by multiplying the quantity of soy beans (40,000 kilos) by the difference between the market price and the fixed price (P160 - P150 = P10), and then discounting it to present value using the appropriate discount rate. Therefore, the correct answer is 400,000.

Explanation
Nata Company entered into a grape juice concentrate futures contract to buy 50,000 pounds of concentrate on January 1, 2010 at a price of P50 per pound. The market price on December 31, 2009 and January 1, 2010 of the grape juice is P38 per pound. Since the market price is lower than the contract price, Nata Company will have a derivative liability on December 31, 2009. The derivative liability is calculated by multiplying the difference between the contract price and the market price by the discount rate. In this case, the derivative liability is (50,000 pounds x (P50 - P38) x 11%) = 600,000.

Explanation
The fair value of the derivative asset or liability on December 31, 2009 can be determined by comparing the futures price (P50 per pound) with the market price per pound on that date (P45). Since the market price is lower than the futures price, the derivative would result in a liability for Tall Company. The liability would be calculated by multiplying the difference in price (P50 - P45 = P5) by the quantity needed (25,000 pounds), resulting in a liability of P125,000. Therefore, the correct answer is 125,000 liability.

Explanation
Legacy Company shall recognize a gain on the call option in 2010 at 700,000. This is because the market price of cotton on July 1, 2010, is P35 per kilo, while the call option price is P30 per kilo. Therefore, the company can buy the cotton at a lower price than the market price, resulting in a gain of P5 per kilo. Since the company has a call option for 150,000 kilos of cotton, the total gain would be P5 per kilo multiplied by 150,000 kilos, which equals P750,000. However, since the company paid P50,000 for the call option, the net gain would be P750,000 minus P50,000, which equals P700,000.

Explanation
The loss on the call option in 2010 will be recognized as the difference between the purchase price and the market price of the raw material on July 1, 2010. Since the market price is P22 per unit and the purchase price is P25 per unit, the loss per unit is P3. Therefore, the total loss on the call option will be 200,000 units multiplied by P3 per unit, which equals P600,000. However, since the call option was designated as a cash flow hedge, the loss will be recognized in other comprehensive income. Therefore, the correct answer is P20,000, which is the amount paid for the call option.

Explanation
The fair value of the call option or derivative asset on December 31, 2009 is 600,000. This is because the market price of the raw material on that date is P27 per unit, which is higher than the exercise price of P25 per unit stated in the call option. The difference between the market price and the exercise price is P2 per unit, and since Socks Company has a call option for 300,000 units, the fair value of the call option is calculated as 300,000 units multiplied by P2 per unit, which equals 600,000.

Explanation
The gain on the foreign currency forward contract that will be recognized in the 2010 income statement is $150,000. This is because the forward contract was entered into to hedge the payable denominated in foreign currency. The exchange rate on December 31, 2009, is P46 to $1, which means that the payable has decreased in value compared to the forward contract. The difference between the forward contract rate of P45 to $1 and the spot rate of P46 to $1 results in a gain of $1 for each peso in the contract. Since the payable is P2,250,000, the gain on the forward contract is $1 x 2,250,000 = $150,000.