Question

In: Finance

On June 1, 2017, Home Investor Funds, Ltd., [HIF] purchases a call option for $1,500, which...

On June 1, 2017, Home Investor Funds, Ltd., [HIF] purchases a call option for $1,500, which gives HIF the right to buy 10,000 shares of Delta Plumbers, Inc., for $27 each until December 1, 2017. Delta shares are currently trading for $26. At June 30, 2017, the option contract could be traded in the market at $48,000. At December 1, 2017, with the shares being traded at $35 each, HIF exercised the option and took delivery of the shares of Delta.

Required: Record all necessary entry/entries related to this contract on the following dates:

a]   June 1, 2017 when HIF acquired the call option.

b]   June 30, 2017, when HIF closes its books of accounts.

c]   December 1, 2017 assuming HIF exercised the call option and took delivery of the shares of Delta.

d] December 1, 2017, assuming HIF settles the call option for cash without taking delivery of the Delta shares.

Solutions

Expert Solution

a. June 1, 2017 when HIF acquired the call option.

Premium paid by HIF for buying the call is 1500$

So Journal entry

Date Particulars Debit Credit
June 1, 2017 Call option asset account 1500$
Bank account 1500$
Being call option purchased

b. June 30, 2017, when HIF closes its books of accounts

Given that the option contract value on June 30, 2017 is 48000$

So the value of contract increased by 48000-1500=46500$

So Journal entry

Date Particulars Debit Credit
June 30, 2017 Call option asset account 46500$
Fair value Profit account 46500$
Being call option Revalued

c. December 1, 2017 the shares are traded at 35$ each

But due to option contract HIF can buy for 27$

so value of the option = (35-27)*10000=8*10000 shares= 80000$

So the value of the option increases by (80000-48000)=32000$

Date Particulars Debit Credit
December 1, 2017 Call option asset account 32000$
Fair value Profit account 32000$
Being call option Revalued
December 1, 2017 shares of Delta Plumbers Account =35*10000=350000$
Call option asset account 80000$
Bank A/c 270000$
being exercised the call option and took delivery of the shares of Delta

d. the call option for cash without taking delivery of the Delta shares.

Date Particulars Debit Credit
December 1, 2017 Call option asset account 32000$
Fair value Profit account 32000$
Being call option Revalued
December 1, 2017 Bank A/c =80000$=(35-27)*10000
Call option asset account 80000$
being exercised the call option without taking delivery of the Delta shares

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

On June 1, 2017, Home Investor Funds, Ltd., [HIF] purchases a call option for $1,500, which...
On June 1, 2017, Home Investor Funds, Ltd., [HIF] purchases a call option for $1,500, which gives HIF the right to buy 10,000 shares of Delta Plumbers, Inc., for $27 each until December 1, 2017. Delta shares are currently trading for $26. At June 30, 2017, the option contract could be traded in the market at $48,000. At December 1, 2017, with the shares being traded at $35 each, HIF exercised the option and took delivery of the shares of...
On June 1, 2007, Prens Funds, Ltd. purchases a call option for $3,000, which gives Prens...
On June 1, 2007, Prens Funds, Ltd. purchases a call option for $3,000, which gives Prens Funds the right to buy 20,000 shares of Delta Plumbers, Inc., for $54 each until December 1, 2007. Delta shares are currently trading for $52. At June 30, 2007, the option contract could be traded in the market at $96,000. At December 1, 2007, with the shares being traded at $70 each, Prens Funds exercised the option and took delivery of the shares of...
On June 1, 2018, DCI purchased a call option for $450, which gave it the right...
On June 1, 2018, DCI purchased a call option for $450, which gave it the right to buy 10,000 shares of iLines, Inc., for $54 each until December 1, 2018 . On that date, iLines’ shares were being traded for $52. On June 30, 2018, the option contract could be traded in the market at $96,000. On December 1, 2018, with the shares being traded at $70 each, DCI exercised the option and took delivery of the shares of iLines....
Consider the following options   portfolio:   You   write   a   June   2017 expiration   call   option   on   Microsoft   with  ...
Consider the following options   portfolio:   You   write   a   June   2017 expiration   call   option   on   Microsoft   with   exercise   price   $72.   You   also write   a   June   expiration   Microsoft   put   option   with   exercise   price $70. (LO   15-2) a.   Graph   the   payoff   of   this   portfolio   at   option   expiration   as   a   function of   the   stock   price   at   that   time.
Jason is an investor who owns 1 share of XYZ and a sold a call option...
Jason is an investor who owns 1 share of XYZ and a sold a call option on 1 share of XYZ. The exercise price of the put option is $100 and XYZ currently trades at $99. The option premium was $3. If the price of XYZ at expiration is $50, the payoff of Jason’s position is: -$3 $0 $100 $50 $99
1. An investor sells a European call option with strike price of E and maturity and...
1. An investor sells a European call option with strike price of E and maturity and buys a put with the same strike price and maturity on the same underlying asset. a. Create a payoff table of this position at expiration b. Show this payoff on a graph
A delta-neutral portfolio has a gamma of -1,500. The delta and gamma of a call option...
A delta-neutral portfolio has a gamma of -1,500. The delta and gamma of a call option are 0.4 and 1.5 respectively. a) How many call options is needed to make it gamma-neutral? b) Making the portfolio gamma-neutral causes the portfolio to no longer be delta-neutral. How many shares of the underlying must be sold to keep it delta-neutral?
1. Define a call and put option. Using the following examples explain what the investor is...
1. Define a call and put option. Using the following examples explain what the investor is receiving. Buy an XYZ July 50 call @ $2.10. Buy an XYZ October 85 put @ $1.75. Sell an XYZ April 40 put @ $3.50. Sell an August 55 call $1.90.
On August 1, 2020, Sage Ltd. purchased a call option from Starco Corporation. The option gave...
On August 1, 2020, Sage Ltd. purchased a call option from Starco Corporation. The option gave Sage the right to buy 8,000 shares in a third company, Dillon Ltd., at a price of $10 per share. On the day Sage purchased the option, Dillon shares were trading at $10 each. Sage paid $1,300 for the options. On August 31, 2020, the Dillon shares were trading at $12 each, and the options for Dillon shares were trading at $25,000. On September...
On June 1, 2020, Krypton Industries [KI] purchased a call option for $ 2,400, giving it...
On June 1, 2020, Krypton Industries [KI] purchased a call option for $ 2,400, giving it the right to buy 2,000 shares of Kriminel Corporation for $ 20 per share. On June 30, 2020, similar options were being traded at $3,100. On August 18, 2020, when the option value was $ 12,000, Omega settles the option for cash. On August 18, 2020, KI settles the option for cash when the option value in the market is $12,000. Prepare the journal...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT