Abalone Inc. purchases a call option contract on January 2, 2020, from Baird Investment Corp. The...

      

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Abalone Inc. purchases a call option contract on January 2, 2020, from Baird Investment Corp." The option gives Abalone the right to purchase 1,000 Laredo Corp. shares (the underlying) at $100 per share (the exercise/strike price), and it expires April 30, 2020. For the right to buy the shares at this fixed price, Abalone pays a premium of $400. This is a financial derivative because the underlying is a financial asset (the Laredo shares). $400 Call option Abalone (right to buy 1,000 Baird Laredo shares for $100 each) At the time of the transaction, Laredo shares are trading at $100. If the price of Laredo shares increases above $100, Abalone can exercise the option and purchase the shares for $100 per share. Alternatively, Abalone may sell the option to someone else. Instructions a. Who has the market risk associated with the Laredo shares and the option? b. Analyze whether this is accounted for as a derivative. c. Prepare the related journal entry at the acquisition date. Abalone Inc. purchases a call option contract on January 2, 2020, from Baird Investment Corp." The option gives Abalone the right to purchase 1,000 Laredo Corp. shares (the underlying) at $100 per share (the exercise/strike price), and it expires April 30, 2020. For the right to buy the shares at this fixed price, Abalone pays a premium of $400. This is a financial derivative because the underlying is a financial asset (the Laredo shares). $400 Call option Abalone (right to buy 1,000 Baird Laredo shares for $100 each) At the time of the transaction, Laredo shares are trading at $100. If the price of Laredo shares increases above $100, Abalone can exercise the option and purchase the shares for $100 per share. Alternatively, Abalone may sell the option to someone else. Instructions a. Who has the market risk associated with the Laredo shares and the option? b. Analyze whether this is accounted for as a derivative. c. Prepare the related journal entry at the acquisition date.

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