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CFA Institute Exam CFA-Level-II Topic 1 Question 99 Discussion

Actual exam question for CFA Institute's CFA-Level-II exam
Question #: 99
Topic #: 1
[All CFA-Level-II Questions]

Jenna Stuart is a financial analyst for Deuce Hardware Company, a U .S . company that reports its results in U .S . dollars. Wayward Distributing, Inc., is a foreign subsidiary of Deuce Hardware, which began operations on January 1,2007. Wayward is located in a foreign country and reports its results in the local currency called the Rho. Selected balance sheet information for Wayward is shown in the following table.

Stuart has been asked to analyze how the reported financial results of Wayward will be affected by the choice of the all-current or temporal methods of accounting for foreign operations. She has gathered the following exchange rate information on the $/Rho exchange rate:

* Spot rate on 1/01/08: $0.35 per Rho

* Spot rate on 12/31/08: $0.45 per Rho

* Average spot rate during 2008: $0.42 per Rho

Will the all-current method report a translation gain or loss for 2008, and will that gain or loss be reported on Deuce's income statement or the balance sheet?

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Suggested Answer: C

Credit risk in a swap is generally highest in rhe middle of the swap. At the end of the swap there are few potential payments left and the probability of either party defaulting on their commitment is relatively low. Therefore, Widby's first comment is incorrect. It Jacobs wants to delay establishing a swap position, a swaption would potentially be an appropriate investment. However, Jacobs should buy a receiver swaption, not a payer swaption. In a payer swaption, Jacobs would pay the fixed-rate and receive the equity index return. The swap underlying a payer swaption would not offset Jacobs's current position. (Study Session 17, LOS 6l.f,i)


Contribute your Thoughts:

Arlean
11 hours ago
I'm not sure about this. Can someone explain why there would be a gain on the income statement with the all-current method?
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Solange
1 days ago
The all-current method will result in a translation gain, which should be reported on the balance sheet. The question clearly states that the spot rate on 12/31/08 is higher than the spot rate on 1/01/08, indicating a gain in the value of the Rho.
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Brandon
2 days ago
I agree with Rocco. The average spot rate during 2008 was higher than the spot rate on 1/01/08, so there should be a gain on the income statement.
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Rocco
8 days ago
I think the all-current method will report a gain on the income statement for 2008.
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