CHAP00A - Appendix Derivatives True/False Questions 1 All...

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Appendix Derivatives True/False Questions 1. All derivatives, no exceptions, are carried on the balance sheet as either assets or liabilities at fair (or market) value. Answer: True 2. Derivative financial instruments exist to lessen, not increase, risk. Answer: True 3. If a futures contract is used to hedge a debt sale, and interest rates go down causing debt security prices to rise, the potential benefit of being able to issue debt at that lower interest rate (higher price) will be offset by a loss on the futures position. Answer: True 4. The financial futures market exists to provide a mechanism to buy and sell the underlying financial instruments. Answer: False 5. The effectiveness of a hedge is influenced by the closeness of the match between the item being hedged and the financial instrument chosen as a hedge. Answer: True 6. Derivatives create either rights or obligations that meet the definition of assets or liabilities. Answer: True 7. If a derivative is not designated as a hedging instrument, or doesn't qualify as one, any gain or loss from fair value changes is not recognized immediately in earnings. Answer: False 8. A gain or loss from a cash flow hedge is recognized immediately in earnings. Answer: False 9. The key criterion for qualifying as a hedge is that the hedging relationship must be highly effective in achieving offsetting changes in fair values or cash flows. Answer: True 10. The seller in a futures contract derives a loss when interest rates rise. Answer: False Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 159
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Appendix Derivatives 11. An option on a financial instrument—say a Treasury note—gives its holder the right either to buy or to sell the Treasury note at a specified price and within a given time period. Answer: True 12. Interest rate swaps exchange fixed interest payments for floating rate payments, or vice versa, without exchanging the underlying principal amounts. Answer: True Matching Pair Questions Use the following to answer questions 13-16: 13-16. Indicate the term that best applies to each of the four transactions described below by placing the letter of the term in the space provided by each transaction. Terms: A. Derivatives B. Hedging C. Futures contract D. Interest rate swaps E. Fair value risk F. Cash flow risk G. Foreign exchange risk H. Fair value hedge Phrases:
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