Derivatives Exam 2 UPDATED ACTUAL
Exam Questions and CORRECT Answers
3 things CF Hedges can be - CORRECT ANSWER - - existing asset or liability
- forecasted transaction that is probable to occur
- Firm commitment denominated in FC
What does probable to occur mean? - CORRECT ANSWER - -likely to occur
-80% or more
9 factors for probability - CORRECT ANSWER - - frequency of similar past transactions
- financial and operational resources to carryout transaction
- substantial resources have been committed
- Extent of loss or disruption if it does NOT happen
-Are there other possible transactions that the company could use to achieve the same results
- Quantity of transaction
- Amount of time until transaction
- Impact of counterparty creditworthiness
, - Is it probable to occur in specified time period?
When to reverse changes out of OCI? - CORRECT ANSWER - Not when forecasted
transaction occurs BUT when it impacts earnings
4 ways a CF hedge gets discontinued - CORRECT ANSWER - - Hedge fails effectiveness
test
- Hedged item no longer qualifies as a forecasted transaction
- Forecasted transaction is exercised BEFORE hedging instrument expires
- Hedging instrument is exercised or expires BEFORE forecasted transaction occurs
What could make a hedged item no longer qualify as forecasted transaction? - CORRECT
ANSWER - - It becomes a firm commitment
- No longer probable within designated time period
When to reverse OCI balances - CORRECT ANSWER - Depends on whether the
forecasted transaction will occur
- within designated time period
-within an additional two month window
What to do if forecasted transaction goes from probable to possible to happen? - CORRECT
ANSWER - QUIT using hedge accounting but still reverse OCI when it hits earnings
Exam Questions and CORRECT Answers
3 things CF Hedges can be - CORRECT ANSWER - - existing asset or liability
- forecasted transaction that is probable to occur
- Firm commitment denominated in FC
What does probable to occur mean? - CORRECT ANSWER - -likely to occur
-80% or more
9 factors for probability - CORRECT ANSWER - - frequency of similar past transactions
- financial and operational resources to carryout transaction
- substantial resources have been committed
- Extent of loss or disruption if it does NOT happen
-Are there other possible transactions that the company could use to achieve the same results
- Quantity of transaction
- Amount of time until transaction
- Impact of counterparty creditworthiness
, - Is it probable to occur in specified time period?
When to reverse changes out of OCI? - CORRECT ANSWER - Not when forecasted
transaction occurs BUT when it impacts earnings
4 ways a CF hedge gets discontinued - CORRECT ANSWER - - Hedge fails effectiveness
test
- Hedged item no longer qualifies as a forecasted transaction
- Forecasted transaction is exercised BEFORE hedging instrument expires
- Hedging instrument is exercised or expires BEFORE forecasted transaction occurs
What could make a hedged item no longer qualify as forecasted transaction? - CORRECT
ANSWER - - It becomes a firm commitment
- No longer probable within designated time period
When to reverse OCI balances - CORRECT ANSWER - Depends on whether the
forecasted transaction will occur
- within designated time period
-within an additional two month window
What to do if forecasted transaction goes from probable to possible to happen? - CORRECT
ANSWER - QUIT using hedge accounting but still reverse OCI when it hits earnings
