Explain "futures arbitrage (i.e., switching)" and how Leeson used it to increase his reported profits
What will be an ideal response?
Futures arbitrage is the buying and selling of financially identical futures contracts that are offered at different prices on two exchanges. Profits are made by purchasing contracts on the relatively cheap exchange and selling them on the relatively expensive one. Because these trades are done simultaneously or within a short period of time, the risks are either non-existent or small relative to the risks of an outright position.
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Brief, Inc., had a receivable from a foreign customer that is payable in the customer's local currency. On December 31, 2017, Brief correctly included this receivable for 200,000 local currency units (LCU) in its balance sheet at $110,000. When Brief collected the receivable on February 15, 2018, the U.S. dollar equivalent was $120,000. In Brief's 2018 consolidated income statement, how much should it report as a foreign exchange gain?
A. $-0- B. $10,000 C. $15,000 D. $25,000
As a result of a court decision, XYZ Company must pay a claimant $100,000 two years from today. What is the present value of the $100,000 award that XYZ Company must pay in two years? Assume a 10 percent interest (discount) rate.
(a) $80,000 (b) $82,645 (c) $93,584 (d) $120,000