Cokolo Inc. has entered into the following two derivatives contracts: Purchased put options on 1,000 Trenton Co.
Question:
Cokolo Inc. has entered into the following two derivatives contracts:
Purchased put options on 1,000 Trenton Co. shares that have an exercise price of $52 per share and expire in 60 days
Negotiated a forward contract to sell 1,000 euros with a specified price of $1.47 per euro and settlement in 60 days
Required:
a) While options and forwards are both derivative instruments, they differ in terms of the nature of the contract and premium (their price). How do options differ from forwards in terms of the contract? How do they differ in terms of their premium (price)?
b) Explain what will happen when the put option matures:
i) If the share price is $35 per share
ii) If the share price is $60 per share
c) Explain what will happen when the forward contract matures:
i) If the spot price is $1.43
ii) If the spot price is $1.51
Intermediate Accounting Volume 2
ISBN: 9781260881240
8th Edition
Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod-Dick, Kayla Tomulka, Romi-Lee Sevel