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Hedge Accounting – Objective Questions

Objective Questions

1. FAS 133 prescribes accounting requirements for
a. Derivative instruments for hedging activities.
b. Debt and equity securities.
c. Fair value measurement.
d. All of the above.

2. Characteristics of a financial derivative instrument include which of the following?
a. Value of the instrument changes in response to underlying.
b. It requires no or comparatively little initial investment.
c. It is to be settled at a future date.
d. All of the above.

3. A financial asset definition does not include
a. Cash.
b. Cash equivalent.
c. Equity instrument.
d. All of the above.

4. On comparing the definition of derivative financial instrument as per U.S. GAAP and IFRS, the only exception highlighted in IFRS is
a. Initial net investment requirement.
b. Future date settlement.
c. Permitting net settlement.
d. None of the above.

5. Which of the standards allows for a shortcut method that assumes perfect effectiveness for certain hedging relationships?
a. IFRS.
b. U.S. GAAP.
c. FAS.
d. None of the above.

6. In FAS 133 which items will not be reported?
a. Reserves and provisions.
b. Income and expense.
c. Partner’s equity.
d. All of the above.

7. Which of the following contracts is not exempted from FAS 133?
a. Derivative instruments.
b. Regular-way security trades.
c. Certain insurance contracts.
d. None of the above.

8. Changes in fair value do not include
a. Changes due to passage of time.
b. Difference in the fair value at the beginning and end of the period.
c. Changes in the accounting period.
d. None of the above.

9. Hedge accounting can be discontinued if
a. The instrument qualifies for speculation.
b. Management wants to change the accounting principles.
c. The derivatives expire.
d. All of the above.

10. If the investor writes a call on the basis of a long position in an underlying asset, it is referred to as a
a. Preferred call.
b. Covered call.
c. Long position call.
d. None of the above.

11. A written option cannot be designated as a hedging instrument unless it is combined with a purchase option and a net premium is paid, according to
a. IFRS.
b. U.S. GAAP.
c. Canadian GAAP.
d. IAS.
e. Not mentioned in any of the above.

12. __________is a number of currency units, shares, bushels, pounds, or other units specified in a contract.
1. Premium.
b. Margin.
c. Notional amount.
d. Collateral amount.
e. Settlement amount.

13. Certain insurance contracts like traditional life insurance contracts and traditional property and casualty contracts are not considered as derivatives, according to
a. FAS 136.
b. FAS 133.
c. IAS 39.
d. FAS 140.
e. IAS 40.

14. A covered call is a situation in which the equity investor writes a call to cover his
a. Long position in an underlying asset.
b. Short position in an underlying asset.
c. Short position in a different equity.
d. Long position in an underlying commodity.
e. Forward risk exposed in the market.

15. Hedging a long position in an underlying is possible by
a. Selling puts.
b. Buying calls.
c. Selling calls.
d. Squaring of short position.
e. Buying puts.

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