Advanced Accounting
Advanced Accounting
12th Edition
ISBN: 9781305084858
Author: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Publisher: Cengage Learning
Question
Book Icon
Chapter 9.M, Problem 4.4E
To determine

Option:

It represents a right to trade some quantity of a particular underlying, whether you 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 fair value hedge.

:

The reasons for the value of option being more than zero in the beginning.

Blurred answer
Students have asked these similar questions
. A major cattle feeding operation has entered into a firm commitment to buy 100,000bushels of corn to be delivered to its feed lot in Kansas. The corn is expected to be delivered in90 days. The company is committed to pay $1.50 per bushel. If corn yields are greater thanexpected, the price of corn could decline and the company would experience higher operatingcosts than necessary as a result of the commitment.In order to protect itself against falling corn prices, the company purchased an option to sellcorn in 90 days at a strike price of $1.51 per bushel delivered to a facility in Nebraska.1. Assuming that the company designated the swap as a fair value hedge, identify several criticalcriteria that would need to be satisfied in order to justify this classification.2. Identify several factors that would suggest that the company’s hedge would qualify as beinghighly effective in reducing the risk associated with the firm’s commitment to buy 100,000bushels of corn.3. Explain why an…
4. Investment timing options Companies often need to choose between making an investment now or waiting until the company can gather more relevant information about the potential project. This opportunity to wait before making the decision is called the investment timing option. Consider the case: Tolbotics Inc. is considering a three-year project that will require an initial investment of $44,000. If market demand is strong, Tolbotics Inc. thinks that the project will generate cash flows of $29,000 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $2,000 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak. If the company uses a project cost of capital of 12%, what will be the expected net present value (NPV) of this project? (Note: Do not round intermediate calculations and round your answer to the nearest whole dollar.) -$7,111 O-$6,433 O-$7,788…
4. Investment timing options Companies often need to choose between making an investment now or waiting until the company can gather more relevant information about the potential project. This opportunity to wait before making the decision is called the investment timing option. Consider the case: General Forge and Foundry Co. is considering a three-year project that will require an initial investment of $42,500. If market demand is strong, General Forge and Foundry Co. thinks that the project will generate cash flows of $28,000 per year. However, if market demand is weak, the company believes that the project will generate cash flows of only $2,000 per year. The company thinks that there is a 50% chance that demand will be strong and a 50% chance that demand will be weak.   If the company uses a project cost of capital of 14%, what will be the expected net present value (NPV) of this project? (Note: Do not round intermediate calculations and round your answer to the…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Text book image
International Financial Management
Finance
ISBN:9780357130698
Author:Madura
Publisher:Cengage