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Call Options – Journal Questions

Journal Questions

Mr. Berkowitz buys 1,000 equity call options of Normal Electricals for $4 per share for a strike price of $25 on June 12, expiry date being July 16. Brokerage is 0.25 percent and is settled on T + 2 basis. Pass necessary journal entries for the following events:

1. Purchase of the options.

2. Brokerage paid for purchase.

3. At the end of the reporting period, June 30, the shares are quoted at $28 per share and the options were worth $2 per share. Ascertain the fair value at that time and pass entries.

4. Assume the options are exercised on the expiry date and for the price of $27. Pass relevant journal entries on July 16, the expiry date.

Long Call, Nonhedging—Functional Currency US$

Prepare journal entries, general ledgers, trial balance, income statement, and balance sheet for the following scenario.
Freedom Fund had the following trades in GE in the options market through ADC brokers, and on January 1 introduced $100,000 as capital.
Date            Product     StrikePrice    Expiry            Quantity     Rate        B/S     Brokerage
25-Jan-X1    Call           $50              16-Mar-X1    10,000      $5.00        B         $540
22-Feb-X1   Call           $50              16-Mar-X1    16,000      $4.00        B         $620
11-Mar-X1   Call           $50              16-Mar-X1    16,000      $3.00        S         $320

Liquidation Method
  FIFO

Market Rate of Underlying Stock, GE
  January 31: 40.00
  February 28: 55.00
  March 16: $55

Market Rate of GE Call Option with Strike Price $50, Expiry March 16
  January 31: 2
  February 28: 6.00

Functional Currency
  US$

 

Long Call, Nonhedging—Trade Currency AUD

Prepare journal entries, general ledgers, trial balance, income statement, and balance sheet for the following scenario.
AA Fund had the following trades in Metadata in the options market through DDT Man brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of the contract as margin money throughout the life of the contract. On January 1, AA Fund introduced $100,000 as capital and converted US$50,000 into AUD at the rate of 1.25.
Date            Product       StrikePrice         Expiry        Quantity      Rate (AUD)    B/S    Brokerage (AUD)
21-Jan-X1      Call          AUD 40        15-Mar-X1      12,000         4.00              B            $500
20-Feb-X1     Call          AUD 40        15-Mar-X1      13,000         5.00              B            $600
12-Mar-X1     Call         AUD 40         15-Mar-X1      15,000         4.00              S            $300

Liquidation Method
  FIFO

Market Rate of Underlying Stock, Metadata (AUD)
  January 31: 35.00
  February 28: 40.00
  March 16:45

Market Rate of Metadata Call Option with Strike Price $40, Expiry March 15
  January 31: 3
  February 28: 5.00

FX Rate AUD/US$
  January 21: 1.2178
  January 31: 1.28964
  February 20: 1.26345
  February 28: 1.24789
  March 12: 1.23645
  March 15: 1.27893

Functional Currency
  US$

Short Call, Nonhedging—Trade Currency JPY

Prepare journal entries, general ledgers, trial balance, income statement, and balance sheet for the following scenario.
Stone Fund had the following trades in Gamut in the options market through MML brokers. The stock exchange requires that the writer of the options maintain 15 percent of the value of the contract as margin money throughout the life of the contract. On February 1, Stone Fund introduced $150,000 as capital and converted half of it into JPY at 122.50.
Date              Product       StrikePrice      Expiry       Quantity      Rate (JPY)     B/S    Brokerage (JPY)
23-Feb-X1     Call              JPY 55        16-Apr-X1   10,000         6.00             S           520
22-Mar-X1     Call              JPY 55        16-Apr-X1   16,000         5.00             S           600
10-Apr-X1     Call              JPY 55        16-Apr-X1   16,000         4.00             B           300

Liquidation Method
  FIFO

Market Rate of Underlying Stock, Gamut
  February 28: 59.00
  March 31: 58
  April 16: 61

Market Rate of Gamut Call Option with Strike Price $55, Expiry April 16
  February 28: 5
  March 31: 4

FX Rate JPY/US$
  February 23: 123.589
  February 28:122.569
  March 22: 124.587
  March 31: 124.7891
  April 10: 123.1562
  April 16: 123.4569

Functional Currency
  US$

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