Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
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Chapter 9.M, Problem 4.5E
To determine
Option:
It represents a rightto trade some quantity of a particular underlying, whetheryou may buy it or sell it.
If an option allows buying a functional stock or share, it is said to be a call option.
If an option allows selling a functional stock or share, it is said to be a put option
Fair value hedge:
A hedge against an asset that has a fixed value that changes according to the supply and demand is known as a fair value hedge.
:
The reasons for whether an option can have a negative value or not.
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If we consider the storage cost of $0.35/bu at the beginning, recalculate the following questions:
1. Suppose the elevator buys 100,000 bushels of corn on Nov 1 at $2.00/bu in cash market, and store the corn to sell in the cash market until Jun 1 at $2.30/bu. What is the elevators gain or loss in cash market?
2. On Nov 1, the elevator could sell corn futures contract at $2.50/bu and buy the contract back on Jun 1 at $2.4/bu. What is the elevators gain or loss in futures market?
3. Calculate the basis for both Nov 1 and Jun 1.
4. Calculate the total return of corn to the elevator through such hedging in the futures market? 5. What is the net profit/loss through above hedging in the futures market?
4 a. Shimada Products Corporation of Japan is anxious to enter the electronic calculatormarket. Management believes that in order to be competitive in world markets, theprice of the electronic calculator that the company is developing cannot exceed $15.Shimada’s required rate of return is 12% on all investments. An investment of$5,000,000 would be required to purchase the equipment needed to produce the300,000 calculators that management believes can be sold each year at the $15 price.Required:Compute the target cost of one calculatorb. Poskey Corporation uses an activity-based costing system with three activity costpools. The company has provided the following data concerning its costs and itsactivity based costing system:Costs:Wages and salaries ............ $400,000Depreciation ...................... 160,000Utilities .............................. 100,000Total ................................... $660,000Distribution of resource consumption:Activity Cost PoolsAssembly Setting Up…
A major cattle feeding operation has entered into a firm commitment to buy 100,000 bushels of corn to be delivered to its feed lot in Kansas. The corn is expected to be delivered in 90 days. The company is committed to pay $1.50 per bushel. If corn yields are greater than expected, the price of corn could decline and the company would experience higher operating costs than necessary as a result of the commitment.In order to protect itself against falling corn prices, the company purchased an option to sell corn in 90 days at a strike price of $1.51 per bushel delivered to a facility in Nebraska.
4. Assume that at the time of acquiring the put option, the price of corn was more than $1.51. Explain why the option had a value of more than zero at inception.5. Assume that one of your colleagues made the following comment: ‘‘An option can never have a negative value; therefore, you can never lose money on an option.’’ Discuss whether or not you agree with your colleague.6. Assuming that…
Chapter 9 Solutions
Advanced Accounting
Ch. 9.M - Prob. 1UTICh. 9.M - Prob. 2UTICh. 9.M - Prob. 3UTICh. 9.M - Prob. 4UTICh. 9.M - Prob. 5UTICh. 9.M - Prob. 1ECh. 9.M - Prob. 2ECh. 9.M - Prob. 3ECh. 9.M - Prob. 4.1ECh. 9.M - Prob. 4.2E
Ch. 9.M - Prob. 4.3ECh. 9.M - Prob. 4.4ECh. 9.M - Prob. 4.5ECh. 9.M - Prob. 4.6ECh. 9.M - Prob. 5ECh. 9.M - Prob. 6.1ECh. 9.M - Prob. 6.2ECh. 9.M - Prob. 7ECh. 9.M - Prob. M.1.1PCh. 9.M - Prob. M.1.2PCh. 9.M - Prob. M.2.1PCh. 9.M - Prob. M.2.2PCh. 9.M - Prob. M.3PCh. 9.M - Prob. M.4.3PCh. 9.M - Prob. M.4.4PCh. 9.M - Prob. M.4.5PCh. 9.M - Prob. M.4.6PCh. 9.M - Prob. M.5PCh. 9.M - Prob. M.6PCh. 9.M - Prob. M.7.1PCh. 9.M - Prob. M.7.2PCh. 9.M - Prob. M.7.3PCh. 9 - Prob. 1UTICh. 9 - Prob. 2UTICh. 9 - Prob. 3UTICh. 9 - Prob. 1.1ECh. 9 - Prob. 1.2ECh. 9 - Exercise 2 (LO 3) The accounting issues associated...Ch. 9 - Prob. 3.1ECh. 9 - Prob. 3.2ECh. 9 - Prob. 3.3ECh. 9 - Prob. 4.1ECh. 9 - Prob. 4.2E
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