Investment Quiz: 12 Questions Part 7

Chocolate Company operates a seafood restaurant. On October 1, 2009, Chocolate determined that it will need to purchase 50,000 kilos of deluxe fish on March 1, 2010. Because of the volatile fluctuation in the price of deluxe fish, on October 1, 2009, Chocolate negotiated a forward contract with a reputable bank for Chocolate to purchase 50,000 kilos of deluxe fish onMarch 1, 2010 at a price of P50 per kilo or P2,500,000. This forward contract was designated as a cash flow hedge. The derivative forward contract provides that if the market price of deluxe fish on March 1, 2010 is more than P50, the difference is paid by the bank to Chocolate. On the other hand, if the market price on March 1, 2010 is less than P50, Chocolate will pay the difference to the bank. On December 31, 2009, the market price per kilo P60 and on March 1, 2010, the market price is .93. What is the fair value of the derivative asset or liability on December 31, 2010?

Seaman Company operates a five-star hotel. The company makes very detailed long-term planning. On October 1, 2009, Seaman Company determined that they would need to purchase 8,000 kilos of Australian lobster on January 1, 2011. Because of the fluctuation in the price of Australian lobster, on October 1, 2009 the company negotiated a special forward contract with a bank for Seaman to purchase 8,000 kilos of Australian lobster on January 1, 2011 at price of P9,600,000. The price of Australian lobster was P1,200 per kilo on October 1. This forward contract was designated as a cash flow hedge.The bank has a staff of financial analysts who specialize in forecasting lobster prices. These analysts are predicting a drop in worldwide lobster prices between October 1, 2009 and January 1, 2011.On December 31, 2009, the price of a kilo of Australian lobster is P1,500. On December 31, 2010 and January 1, 2011, the price of a kilo of Australia lobster is P1,000. The appropriate discount rate throughout this period is 10%. The present value of 1 at 10% for one period is .91. The periodic system is used.What is the notional value of the forward contract?

Seaman Company operates a five-star hotel. The company makes very detailed long-term planning. On October 1, 2009, Seaman Company determined that they would need to purchase 8,000 kilos of Australian lobster on January 1, 2011. Because of the fluctuation in the price of Australian lobster, on October 1, 2009 the company negotiated a special forward contract with a bank for Seaman to purchase 8,000 kilos of Australian lobster on January 1, 2011 at price of P9,600,000. The price of Australian lobster was P1,200 per kilo on October 1. This forward contract was designated as a cash flow hedge. The bank has a staff of financial analysts who specialize in forecasting lobster prices. These analysts are predicting a drop in worldwide lobster prices between October 1, 2009 and January 1, 2011. On December 31, 2009, the price of a kilo of Australian lobster is P1,500. On December 31, 2010 and January 1, 2011, the price of a kilo of Australia lobster is P1,000. The appropriate discount rate throughout this period is 10%. The present value of 1 at 10% for one period is .91. The periodic system is used.What is the derivative asset or liability on December 31, 2009?

Seaman Company operates a five-star hotel. The company makes very detailed long-term planning. On October 1, 2009, Seaman Company determined that they would need to purchase 8,000 kilos of Australian lobster on January 1, 2011. Because of the fluctuation in the price of Australian lobster, on October 1, 2009 the company negotiated a special forward contract with a bank for Seaman to purchase 8,000 kilos of Australian lobster on January 1, 2011 at price of P9,600,000. The price of Australian lobster was P1,200 per kilo on October 1. This forward contract was designated as a cash flow hedge. The bank has a staff of financial analysts who specialize in forecasting lobster prices. These analysts are predicting a drop in worldwide lobster prices between October 1, 2009 and January 1, 2011. On December 31, 2009, the price of a kilo of Australian lobster is P1,500. On December 31, 2010 and January 1, 2011, the price of a kilo of Australia lobster is P1,000. The appropriate discount rate throughout this period is 10%. The present value of 1 at 10% for one period is .91. The periodic system is used. What is the derivative asset or liability on December 31, 2010?

Indian Company requires 40,000 kilos of soy beans each month in its operations. To eliminated the price risk associated with the purchase of soy beans, on December 1, 2009, Indian entered into a futures contract as a cash flow hedge to buy 40,000 kilos of soy beans at P150 per kilo on January 1, 2010. The market price on December 31, 2009 and January 1, 2010 is P160 per kilo. The appropriate discount rate is 9% and the present value of 1 at 9% for one period is .917. The periodic system is used.Indian Company shall recognize on December 31, 2009 a derivative asset at:

Nata Company produces bottled grape juice. Grape juice concentrate is typically bought and sold by the pound. Nata uses 50,000 pounds of grape juice concentrate each month.On November 1, 2009, Nata entered into a grape juice concentrate futures contract as a cash flow hedge 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. The appropriate discount rate is 11%. The periodic system is used.Nata Company shall recognize on December 31, 2009 a derivative liability at:

Tall Company requires 25,000 pounds of copper each month in its operations. To eliminate the price risk associated with copper purchases, on December 1, 2009, Tall entered into a futures contract as a cash flow hedge to buy 25,000 pounds of copper on June 1, 2010. The futures price is P50 per pound.The futures contract is managed through an exchange, so Tall does not know the other party on the other side of the contract. As with most derivative contracts, this futures contract is settled by an exchange of cash on June 1, 2010 based on the price of copper on that date.The market price per pound is P45 on December 31, 2009 and P42 on June 1, 2010. What is the fair value of the derivative asset or liability on December 31, 2009?

Legacy Company produces colorful 100% cotton T-shirts that are very popular among the youth. The company uses 150,000 kilos of cotton each month in its production process. In accordance with the company's long-term planning, the company normally procures one month supply of cotton to be used in its production process.On December 31, 2009, Legacy Company purchased a call option as a cash flow hedge to buy 150,000 kilos of cotton on July 1, 2010. The call option price is P30 per kilo. The company paid P50,000 for the call option. The market price of cotton on July 1, 2010 is P 35 per kilo.Legacy Company shall recognize gain on call option 2010 at:

Book Company uses approximately 200,000 units of raw material in its manufacturing operations. On December 31, 2009, Book Company purchased a call option to buy 200,000 units of the raw material on July 1, 2010 at a price of P25 per unit. The company paid P20,000 for the call option. Book designated the call option as a cash flow hedge against price fluctuation for its July purchase. The market price of the raw material on July 1, 2010 is P22 per unit.Book Company shall recognize loss on call option in 2010 at:

Socks Company uses approximately 300,000 units of raw material in its manufacturing operations. On December 1, 2009, Socks Company purchased a call option to buy 300,000 units of the raw material on March 1, 2010 at a price of P25 per unit. Socks paid P50,000 for the call option and designated the call option as a cash flow hedge against price fluctuation for its March purchase.On December 31, 2009, the market price of the raw material is P27 per unit and on March 1, 2010, the market price is P28.What is the fair value of the call option or derivative asset on December 31, 2009?

On September 1, 2009, Denver Company purchased equipment from USA for $50,000 to be paid on March 1, 2010. The exchange rate on September 1, 2009 is P45 to $1. On the same date, Denver entered into a foreign currency forward contract and agreed to pay P2,250,000 at the rate of P45 to $1. This forward contract is designated as a fair value hedge of the payable that is denominated in foreign currency.The peso exchange rate to the dollar is P46 on December 31, 2009 and P49 on March 1, 2010.What is the gain on foreign currency forward contract that will be recognized in the 2010 income statement?