Module 4 Financial Instruments

Question 1 (6 marks) Explain why financial instruments can be classified as financial liabilities or equity instruments. References to relevant accounting standards are required.

Question 2 (4 marks) On 1 September 2017, Golden Doors entered into a forward exchange rate contract to purchase US$300 000 at a rate of A$1 = US$0.69. This is also the sport rate on the day. On 2 September 2017, Golden Doors took delivery of inventory from its US supplier at a price of US$300 000 when the spot rate was A$1 = US$ 0.65. Calculate the amount Golden Doors would have paid on 2 September 2017 in A$ if it had not entered into the forward exchange rate contract, and any gain or loss it made (rounded to the nearest dollar).

Question 3 (10 marks) Mickey Ltd has 1 500 shares in Minnie Ltd. The current price of Minnie Ltd's shares is $40 per share. Mickey Ltd will need to sell these shares in 10 months to acquire cash for a capital project. Mickey Ltd is concerned about the price fluctuations over the next 10 months, and decides to enter a future contract on Minnie Ltd's shares, in which Mickey Ltd takes a sell position. The price of the future is $42 and the contract is for 1 500 futures. Ten months later, the price of Minnie Ltd shares has fallen to $35.00 and the market price of a future with Minnie Ltd is now $38.00. a) Calculate the total gains and losses Mickey Ltd receives for the above transactions. Show all your workings. (5 marks) b) Explain why Mickey Ltd would have entered into a futures contract. Would Mickey Ltd have been in a better financial position if it hadn't taken out the futures contract? Why? Show all your workings. (5 marks)