Interest Risk Mgt Quiz

Under GAAP, what must be included in the documentation at the inception of a hedge?

• Only the identification of the hedging instrument
• Only the risk management objectives
• The relationship between the hedging instrument and the hedged item, the risk management objectives, and how the effectiveness calculation is measured
• Just the expected date of occurrence and amount of the forecasted transaction

Which type of hedging relationship must be expected to be highly effective in producing offsetting cash flows and evaluated at least quarterly?

• Speculative hedge
• Fair value hedge
• Cash flow hedge
• Arbitrage hedge

When a derivative is designated as a cash flow hedge, where is the effective portion of the gain or loss reported?

• Earnings
• Other comprehensive income
• Shareholders’ equity
• Revenue

Which of the following is not required for a forward rate agreement (FRA)?

• Collateral requirement
• Counterparty limits imposed
• Settlement frequency at expiry date
• Agreement type customized

What are the two main forms of derivative financial instruments used in interest risk management?

• Bonds and stocks
• Options and futures
• Option contracts and forward contracts
• Commodities and currencies

Which of the following controls is specifically designed for cash flow hedges?

• Verify contract terms and signatory.
• Confirm all hedging transactions.
• Include in the monthly financial statement procedure a review of the likely occurrence of forecasted cash flow transactions.
• Reconcile all debt and investment accounts to counterparty account balances on a monthly basis.

How should the effective portion of a gain or loss on a cash flow hedge be reported?

• In earnings.
• In retained earnings.
• In other comprehensive income.
• In the notes to the financial statements.

What must be documented to establish a valid cash flow hedge?

• Only the hedging instrument and the risk management objectives.
• The relationship between the hedging instrument and an asset, liability, or forecasted transaction, the hedging strategy, risk management objectives, and how the effectiveness of the transaction shall be measured.
• Only the expected date of occurrence and amount of the hedged transaction.
• Only the method for gain or loss recognition.

What is the primary characteristic of a cash flow hedge?

• It hedges against the risk associated with future interest payments from a fixed-interest balance sheet transaction.
• It hedges against the risk associated with future interest payments from a variable-interest balance sheet transaction.
• It hedges against the risk associated with the fair value of existing fixed-interest balance sheet items.
• It hedges against currency exchange rate fluctuations.

Which of the following statements is true about the accounting treatment of derivatives that are not designated as hedges?

• They are recognized as assets or liabilities at their fair value and changes in fair value are recorded in other comprehensive income.
• They are recognized as assets or liabilities at their fair value and changes in fair value are recorded in earnings.
• They are recognized at their nominal value and changes in fair value are ignored.
• They are recognized at cost and amortized over their useful life.