Derivatives and Hedging for Accountants. Course #6270/QAS6270 Exam Packet

Transcription

1 Derivatives and Hedging for Accountants Course #6270/QAS6270 Exam Packet

2 DERIVATIVES AND HEDGING FOR ACCOUNTANTS (COURSE #6270/QAS6270) COURSE DESCRIPTION A derivative is a financial product that derives its value based on an underlying asset, liability, or other variable (such as an interest rate, foreign currency, or commodity price). Derivatives have become very popular tools for hedging (i.e., reducing) financial risk; they have also become an increasingly standard item on big companies' balance sheets. Yet, understanding how they work, what they are used for, and how they can affect the bottom line of a business has proven to be a significant challenge for the accounting and auditing industries. This course provides an accountant-friendly overview of financial risk management and derivative instruments. This overview focuses on the various types of risk that impact financial markets today, as well as the four major categories of derivatives commonly used to hedge these risks (i.e., forwards, futures, swaps, and options). Uses the materials entitled Derivatives and Hedging for Accountants. Prerequisites: General understanding of financial instruments. Course level: Intermediate. Course #6270/QAS CPE hours. LEARNING ASSIGNMENTS and OBJECTIVES As a result of studying each assignment, you should be able to meet the objectives listed below each individual assignment. ASSIGNMENT SUBJECT 1 Introduction to Derivatives and Hedging Study the course materials for chapter 1 Complete the review questions throughout the chapter Answer the exam questions 1 to 5 Objectives: To define the various types of risk that impact financial markets To recognize proper financial risk management practices To describe the tools used to manage financial risk ASSIGNMENT SUBJECT 2 Forwards Study the course materials for chapter 2 Complete the review questions throughout the chapter Answer the exam questions 6 to 13 Objectives: To describe the unique characteristics of forward contracts To recognize appropriate hedging practices using forward contracts To calculate the payoff from a forward contract To calculate forward prices and describe the effects of arbitrage on forward pricing Exam Page -1

3 ASSIGNMENT SUBJECT 3 Futures Study the course materials for chapter 3 Complete the review questions throughout the chapter Answer the exam questions 14 to 23 Objectives: To describe the differences between futures and forwards To explain the mechanics of futures exchanges To calculate futures daily margin requirements To describe the financial and operational risks associated with using futures contracts as hedging tools ASSIGNMENT SUBJECT 4 Swaps Study the course materials for chapter 4 Complete the review questions throughout the chapter Answer the exam questions 24 to 33 Objectives: To describe the unique characteristics of swap agreements and recognize the differences between the various types of swaps To calculate swap settlement amounts To recognize appropriate hedging practices using swaps Exam Page -2

4 ASSIGNMENT SUBJECT 5 Options Study the course materials for chapter 5 Complete the review questions throughout the chapter Answer the exam questions 34 to 40 Objectives: To describe the unique characteristics of option contracts To recognize the differences between option contracts and other types of derivative products To recognize appropriate hedging practices using option contracts To calculate the payoff from an option contract ASSIGNMENT 6 Complete the Answer Sheet and Course Evaluation and mail to PES for credit NOTICE This course and test have been adapted from materials and information contained in the materials entitled Derivatives and Hedging for Accountants and any supplemental material provided. This course is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice and assumes no liability whatsoever in connection with its use. Since laws are constantly changing, and are subject to differing interpretations, we urge you to do additional research and consult appropriate experts before relying on the information contained in this course to render professional advice. Professional Education Services, LP 2010 Program publication date 10/6/10 Exam Page -3

5 DERIVATIVES AND HEDGING FOR ACCOUNTANTS (COURSE #6270/QAS6270) EXAM OUTLINE COURSE EXPIRATION DATE: Per AICPA and NASBA standards, this course must be completed within one year from the date of purchase. TEST FORMAT: The following final exam, consisting of 40 true/false and/or multiple choice questions, is based specifically on the material included in this course. The answer sheet must be completed and returned to PES for CPE certification. You will find the answer sheet at the back of this exam packet so that you may easily remove it and use it while taking your test. LICENSE RENEWAL INFORMATION: The Derivatives and Hedging for Accountants course (#6270/QAS6270) qualifies for 8 CPE hours. PROCESSING: Your exam will be graded promptly. You must score 70% or better to pass. When you pass, your certificate of completion will be mailed. If you do not pass, we will give you a courtesy call to inform you of this and then another answer sheet will be sent to you free of charge. GRADING OPTIONS: Please choose only one of the following. There is no additional charge for any of these grading options. Make sure to fill out your answer sheet completely prior to submitting it. ONLINE GRADING Visit our website at Login to your account (if you are a first-time user you must set up a new user account). Go to the MY CPE tab and click the My CPE Exams in Progress folder. If your exam is not already located in this folder, click Add Exam Previously Purchased and follow the instructions. MAIL Your exam will be graded and your certificate of completion mailed to you the same day we receive it. Your certificate will be dated according to the postmark date; therefore, you do not need to overnight your exam. Please mail your answer sheet to: Professional Education Services, LP 4208 Douglas Blvd., Ste 50 Granite Bay, CA FAX Your exam will be graded and you will be contacted either via phone or fax with your results within 4 business hours of receipt. A copy of your graded exam and certificate of completion will be mailed to you the same day we receive it. Your certificate will be dated according to the fax date. If you choose to fax your exam, please do not mail it. Your fax will serve as the original. Please refer to the attached answer sheet for further instructions on fax grading. Fax number (916) Thank you for using Professional Education Services. We appreciate your business!! Exam Page -4

6 USE THE INFORMATION BELOW FOR EXAM QUESTIONS 17 THROUGH 20 The following is an excerpt from a Sidious, Inc. s futures margin account statement. Sidious, Inc. opened this account on the morning of 6/1/X1. Day Market Price MTM gain/ (loss) ($) Cumulative gain/loss ($) Margin acct balance ($) Margin call ($) , /1/X , /2/X , /3/X (208.33) , /4/X (625.00) (500.00) 49, /5/X (875.00) (1,375.00) 48, /8/X (500.00) (1,875.00) 48, /9/X (1,125.00) (3,000.00) 50, , /10/X (650.00) (3,650.00) 49, /11/X (690.00) (4,340.00) 48, /12/X (910.00) (5,250.00) 50, , /15/X , (4,000.00) 51, USE THE INFORMATION BELOW FOR EXAM QUESTIONS 24 THROUGH 27 The following is an excerpt from a swap confirmation. The 1-year LIBOR rate applicable to the 6/30/X2 and 6/30/X3 payments equals 4% and 6.25% respectively. Trade date Effective date Maturity date 6/29/20X1 6/30/20X1 6/30/20X6 Fixed amounts: Fixed-rate payer Vader Corp. Fixed-rate notional principal USD 10,000,000 Fixed rate 5% Fixed-rate payment dates Each June 30 commencing 6/30/X2 up to and including 6/30/X6. Floating amounts: Floating-rate payer Empire Bank Floating-rate notional principal USD 10,000,000 Floating rate USD 1-year LIBOR Floating rate spread N/A Floating-rate payment dates Each June 30 commencing 6/30/X2 up to and including 6/30/X6. Exam Page -5

7 USE THE INFORMATION BELOW FOR EXAM QUESTIONS 29 THROUGH 30 The following is an excerpt from a swap confirmation. Settlement amounts are not netted under the terms of this agreement. Trade date Effective date Maturity date 9/29/20X2 9/30/20X2 9/30/20X9 USD amounts: USD payer Boba, Inc. USD principal USD 80,375,000 USD rate 5.40% USD payment dates Each September 30 commencing 9/30/X3 up to and including 9/30/X9. CAD amounts: CAD payer Empire Bank CAD principal CAD 100,000,000 CAD rate 6.75% CAD payment dates Each September 30 commencing 9/30/X3 up to and including 9/30/X9. USE THE INFORMATION BELOW FOR EXAM QUESTIONS 34 THROUGH 39 The following table represents a snapshot of four stock option contracts currently owned by Viceroy Financial. Viceroy did not pay or receive any option premiums for these contracts. Open Option Positions - 10/31/X9 Option Position Type Strike Spot A Long Put B Short Call C Short Put D Long Call Exam Page -6

8 DERIVATIVES AND HEDGING FOR ACCOUNTANTS (COURSE #6270/QAS6270) FINAL EXAM The following questions are either true or false and/or multiple choice. Please indicate your choice on the enclosed Answer Sheet. 1. Which of the following scenarios is most likely the result of a company s exposure to systematic risk: a) Company A s revenues decline after the U.S. unemployment rate increases b) Consumer B incurs losses after its union employees declare a strike c) Company C s construction expenses increase after the price of concrete increases d) Company D incurs losses after writing off one of their accounts receivable Use the following for questions 2 through 4: Fett Bank purchased a corporate debt security from Hutt, Inc., (a U.S. based, BB rated company) on 9/30/X1. The investment earns an 8% fixed rate of interest. Fett accounts for the instrument at fair value under U.S. GAAP. On 12/31/X1, Fett recognized an unrealized loss on the investment after the Federal Reserve raised interest rates. On 12/31/X2, Fett recognized significant realized losses on the investment after Hutt, Inc. filed for bankruptcy. 2. The investment losses that Fett Bank recognized on their 12/31/X1 financial statements are most likely associated with which of the following risks: a) credit risk b) interest rate risk c) political risk d) inflation risk 3. Which of the following actions could Fett Bank have taken to measure and monitor their exposure to the risk associated with their 12/31/X1 losses: 4. Which of the following risk management practices would have most likely prevented the investment losses recognized by Fett Bank on 12/31/X2: a) monitoring the duration of their investments b) prohibiting the purchase of belowinvestment-grade securities c) matching interest-sensitive assets with interest-sensitive liabilities d) purchasing a forward exchange forward contract 5. Which of the following items would most likely be impacted by FX translation risk: a) Company A s assets and liabilities reported on their balance sheet b) Company B s floating rate assets c) Company C s BBB rated investments d) Company D s foreign denominated sales contracts 6. Which of the following is an example of a forward contract: a) Company A s commitment to purchase 100 barrels of oil for delivery today at the current market price b) Company D s first right of refusal to purchase a lot of real estate at a market rate c) Company C s commitment to purchase 1,000,000 euros in 3 months at a specified exchange rate d) Company D s right to sell 50,000 shares of Exxon Mobil common stock to a third party for $75 per share over the next 3 months a) increase their lobbying efforts b) purchase a credit derivative c) monitor foreign exchange rates d) perform a duration analysis Exam Page -7

9 Use the following for questions 7 through 9: Grievous, Inc. has entered into two separate forward contracts. Contract A is a 6 month long forward contract for 10,000 bushels of corn. The market price of corn on the contract execution date equals $3.00 per bushel. The market price of corn on the delivery date specified in the contract equals $4.00 per bushel. Contract B is a 12 month short forward contract for 20,000 bushels of wheat. The market price of wheat on the contract execution date equals $8.00 per bushel; however the delivery price included in the forward contract equals $7.00 per bushel. 7. Which of the following best describes Grevious s responsibilities under the terms of its corn forward contract: a) Grievous is obligated to sell 10,000 bushels on the delivery date at the specified forward price b) Grievous is obligated to purchase 10,000 bushels on the delivery date at the specified forward price c) Grievous is obligated to sell 10,000 bushels on the delivery date at the current market price d) Grievous is obligated to purchase 10,000 bushels on the delivery date at the current market price 8. The payoff value of Contract A will as the increases. a) increase; spot price of corn b) decrease; spot price of wheat c) increase; spot price of wheat d) decrease; spot price of corn 9. Under which of the following scenarios would Grievous earn a payoff profit on its short forward contract: a) the market price of wheat increases to $10.00 per bushel b) the market price of wheat increases to $9.00 per bushel c) the market price of wheat declines to $7.00 per bushel d) the market price of wheat declines to $6.00 per bushel 10. Which of the following is an example of a company earning a profit as a result of arbitrage: a) Company A purchases long and short 6 month oil forward contracts with the same forward price b) Company B purchases a security in the U.S. market for $100 and simultaneously sells that security in the European market for $105 c) Company C purchases a share of stock for $75 and sells it for $90 three years later d) Company D issues floating rate debt and uses the proceeds to purchase a floating rate investment Use the following for questions 11 through 13: Sith Financial has entered into a 12 month forward rate agreement with one of their customers. Sith will receive a 3% annual interest rate under the agreement in exchange for an interest payment based on 12 month LIBOR. The notional principal on the trade equals $5,000, Sith s customer most likely entered into the FRA in order to hedge: a) foreign exchange risk b) credit risk c) interest rate risk d) liquidity risk 12. Which of the following best describes the role that the notional principal will serve in the forward rate agreement between Sith Financial and its customer: a) the notional principal will be exchanged by the counterparties b) the notional principal will be held in a margin account c) the notional principal will serve no purpose under the terms of this FRA d) the notional principal will be used to calculate the cash flows paid and received 13. If 12 month LIBOR is observed as 4.25% in accordance with this FRA, the payoff will equal a to Sith Financial. a) $212,500 net loss b) $62,500 net loss c) $62,500 net gain d) $212,500 net gain Exam Page -8

10 14. Which of the following contracts is most likely an example of an exchange traded derivative: a) Company A s Eurobond futures contract b) Company B s euro-denominated interest rate swap c) Company C s euro-denominated loans receivable d) Company D s euro forward contract Use the following for questions 15 and 16 The Maul Group has placed two oil futures orders. Under the first order, Maul will automatically sell 10,000 oil futures contracts if the market price falls below $70. Under the second order, Maul will purchase 5,000 oil futures contracts at the current market price. 15. The Maul Group s first futures order is an example of a: a) limit order b) long order c) stop order d) market order 16. The Maul Group s second futures order is an example of a: a) limit order b) long order c) stop order d) market order Use the following and the table on exam page 5 for questions 17 through 20: The following is an excerpt from a Sidious, Inc. s futures margin account statement. Sidious, Inc. opened this account on the morning of 6/1/X The initial margin required on the Sidious margin account equals: a) $0 b) $3,000 c) $48,000 d) $50, If the futures market price on 6/16/X1 falls to 45.00, Sidious, Inc. will be required to deposit into their margin account. a) $0 b) $1,000 c) $2,250 d) $5, The $2,250 that Sidious deposited into their margin account on 6/12/X1 is referred to as: a) maintenance margin b) called margin c) supplementary margin d) variation margin 20. Which of the following organizations would most likely be responsible for processing Sidious, Inc. s futures trades: a) The Securities and Exchange Commission b) the OTC counterparty c) the exchange clearinghouse d) Sidious, Inc. s treasury department 21. Company A has entered into a short hedge position using a Japanese yen (JPY) futures contract. As a result of this hedge, Company A will realize a loss when the value of the yen and a gain when the value of the yen. a) increases; increases b) increases; decreases c) decreases; increases d) decreases; decreases 22. Company B has entered into a long hedge position using a Canadian dollar (CAD) futures contract. As a result of this hedge, Company B will realize a loss when the value of the Canadian dollar and a gain when the value of the Canadian dollar. a) increases; increases b) increases; decreases c) decreases; increases d) decreases; decreases 23. Which of the following futures trading practices would generally be considered the riskiest: a) Company A hedges the sale of its assets using short futures contracts b) Company B places stop and limit orders when purchasing futures contracts c) Company C posts margin only when required by the futures exchange d) Company D frequently trades futures for speculative purposes Exam Page -9

11 Use the following and the table on exam page 5 for questions 24 through 27: The following is an excerpt from a swap confirmation. The 1-year LIBOR rate applicable to the 6/30/X2 and 6/30/X3 payments equals 4% and 6.25% respectively. 24. The swap agreement outlined in this confirmation is most likely an example of: a) an interest rate swap b) a credit default swap c) a currency swap d) an equity swap 25. The $10 million notional amount included as part of the swap agreement will: a) be exchanged on the effective date of the swap only b) be exchanged on the maturity date of the swap only c) be exchanged on the effective date and the maturity date of the swap d) not be exchanged 26. Under the terms of this swap agreement, will remit a net settlement amount of approximately on 6/30/X3. a) Empire Bank; $100,000 b) Vader Corp; $100,000 c) Empire Bank; $125,000 d) Vader Corp; $125, The market value of the swap agreement increases significantly (in Empire Bank s favor) during 20X3. Which of the following actions will Vader Corp. most likely take to ensure compliance with the credit support annex established with Empire Bank: a) enter into a separate debt agreement with Empire Bank b) send additional collateral to Empire Bank c) terminate the swap agreement d) deposit additional funds into their margin account 28. Which of the following combinations would most likely create a synthetic floating rate bond: a) Company A combines a fixed rate bond with an interest rate swap b) Company B combines a floating rate bond with a put option c) Company C combines a fixed rate bond with a FX forward d) Company D combines a floating rate bond with a credit default swap Use the following and the table on exam page 6 for questions 29 through 30: The following is an excerpt from a swap confirmation. Settlement amounts are not netted under the terms of this agreement. 29. The USD and CAD principal amounts included as part of the swap agreement will be: a) exchanged on the effective date of the swap only b) exchanged on the maturity date of the swap only c) exchanged on the effective date and the maturity date of the swap d) not be exchanged 30. Under the terms of this swap agreement, Boba, Inc. will pay to Empire Bank in exchange for on 9/30/X3. a) $6.75 million USD; $4.34 million CAD b) $5.40 million CAD; $5.43 million USD c) $5.40 million USD; $5.43 million CAD d) $6.75 million CAD; $4.34 million USD Use the following for questions 31 through 32: Jango Corp. currently owns a large amount of fixed rate corporate debt issued by Lucas Manufacturing that is denominated in British pounds (GBP). Jango has purchased a credit default swap from Separatist Bank to hedge the credit risk associated with this debt. Jango Corp. is a public company that files periodic filings with the Securities and Exchange Commission. 31. Under the terms of the credit default swap, the reference entity is: a) Jango Corp b) Lucas Manufacturing c) Separatist Bank d) the Securities and Exchange Commission Exam Page -10

12 32. Assuming that a credit event occurs, the amount due to Jango Corp. under the terms of the credit default swap would most likely equal: a) the current value of the referenced debt b) the dollar value change in the GBP/USD exchange rate c) the periodic protection fee d) zero 33. Dooku Corp. owns a derivative contract whereby it remits an amount based on the annual return of the S&P 500 in exchange for a fixed rate of interest. This transaction would most likely be classified as: a) a credit default swap b) a commodity swap c) an interest rate swap d) an equity swap Use the following and the table on exam page 6 for questions 34 through 39: The following table represents a snapshot of four stock option contracts currently owned by Viceroy Financial. Viceroy did not pay or receive any option premiums for these contracts. 34. Based on the above information, is(are) considered at-the-money as of 10/31/X9. a) Options A and B b) Options A and C c) Option C only d) Option D only 35. Based on the above information, is(are) considered in-the-money as of 10/31/X9. a) Options A and B b) Options A and C c) Option C only d) Option D only 36. Based on the above information, is(are) considered out-of-the-money as of 10/31/X Under the terms of option A, Viceroy has the to the underlying stock at a price of per share. a) right; buy; $58.00 b) obligation; buy; $50.00 c) right; sell; $50.00 d) obligation; sell; $ Under the terms of option D, Viceroy has the to the underlying stock at a price of per share. a) right; buy; $15.00 b) obligation; buy; $25.00 c) right; sell; $25.00 d) obligation; sell; $ If the spot price of Option D s underlying stock declined to $12.00 per share just prior to the expiration date, Viceroy would most likely: a) exercise the option and realize a $3 per share gain b) allow the option to expire worthless c) lock in their hedging gains using a forward contract d) deliver the underlying stock for a $13 per share loss 40. Rancor, Inc. has sold a call option tied to the stock price of Jabba Corp. Rancor has also purchased shares of Jabba Corp. s stock to protect them from losses on the option contract that would result from sharp increases in the stock price. This hedging strategy is generally referred to as: a) a straddle b) a covered call c) a combination d) a bull spread Congratulations you ve completed the exam! a) Options A and B b) Options A and C c) Option C only d) Option D only Exam Page -11

13 DERIVATIVES AND HEDGING FOR ACCOUNTANTS #6270/QAS6270 (8 CPE hours) ANSWER SHEET (10/10) Important Note: For certification, this answer sheet must be completed and submitted to PES for grading within one year from the date of purchase. Please use black ink and print for quicker processing thank you. Name (as it appears on your license) Address City State Zip Home Work Daytime Phone ( ) address (for online grading) License Number State Expiration Date CPA, CFP, EA (circle one) If course was ordered by another party, please indicate name here: GRADING OPTIONS Please choose only ONE of the following: ONLINE GRADING Visit our website at o Login to your account (if you are a first-time user, you must set up a new user account). o Go to the MY CPE tab and click the My CPE Exams in Progress folder. o If your exam is not already located in this folder, click Add Exam Previously Purchased and follow the instructions. Mail Mail your exam to: PES, 4208 Douglas Blvd., Ste 50, Granite Bay, CA Fax Fax your exam to (916) and choose one of the following options: Please: mail my results only or fax phone my results to: ( ) PLEASE INDICATE YOUR ANSWER BY FILLING IN THE APPROPRIATE CIRCLE A B C D A B C D 1. O O O O 21. O O O O 2. O O O O 22. O O O O 3. O O O O 23. O O O O 4. O O O O 24. O O O O 5. O O O O 25. O O O O 6. O O O O 26. O O O O 7. O O O O 27. O O O O 8. O O O O 28. O O O O 9. O O O O 29. O O O O 10. O O O O 30. O O O O 11. O O O O 31. O O O O 12. O O O O 32. O O O O 13. O O O O 33. O O O O 14. O O O O 34. O O O O 15. O O O O 35. O O O O 16. O O O O 36. O O O O 17. O O O O 37. O O O O 18. O O O O 38. O O O O 19. O O O O 39. O O O O 20. O O O O 40. O O O O Please complete the attached course evaluation your opinion is extremely valuable. Exam Page -12

14 Derivatives and Hedging for Accountants #6270/QAS Course Evaluation Rate on a scale of 1-10 with 1 being poor and 10 being excellent. 1. The course met the course objectives described in the promotional material. 2. The course was up to date, held my interest, was timely, and effective. 3. The course materials were understandable, valuable, and suitable for a correspondence course. 4. The amount of advance knowledge and stated prerequisites were appropriate. 5. The completion time was appropriate for the number of credits allowed. 6. The course met my professional education needs. Please answer the following questions mark/rate any and all that may apply 1. How would you rate PES s order desk customer service 2. What can PES do to keep you as a valued customer? 3. Any other comments regarding this course or our company would be appreciated. 4. What other courses/subjects would you like to see PES offer in the future? Mail to: Professional Education Services, LP 4208 Douglas Blvd., Ste 50, Granite Bay, CA Exam Page -13