Question 1

What is meant by an 'interest rate swap'? Illustrate your answer with a simple example of how such a swap operates and how it would affect the parties concerned.Why might businesses engage in an interest rate swap?

Accepted Answer

The answer of What is meant by an 'interest rate...

Question 2

A buyer of a futures contract:

Accepted Answer

A buyer of a futures contract is obligated to buy the underlying asset at the contract's expiration, unlike options where the buyer has a right but not an obligation.

Question 3

An 'interest rate swap' generally involves:

Accepted Answer

An 'interest rate swap' involves two (or more) parties exchanging floating interest rates for fixed interest rates on loans.

Question 4

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $100 000 10% treasury bonds is $3.50.
What was the initial journal entry to record the option?

Accepted Answer

The initial journal entry to record the option would be to debit "Purchased Put Option" for $395,000 (10 bonds x $100,000 x $3.95) and credit "Cash" for the same amount. Therefore, the correct choice is A.

Question 5

The buyer of a put option on shares:

Accepted Answer

A put option gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price (strike price) within a specified time period. This means the buyer of a put option can decide to sell the shares at the agreed-upon price, regardless of the market price at that future time.

Question 6

Discuss the disclosure requirements in AASB 7 Financial Instruments Disclosure and AASB 132 Financial Instruments Presentation.

Accepted Answer

The answer of Discuss the disclosure requirements in AASB 7...

Question 7

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $100 000 10% treasury bonds is $3.50.
What would be the journal entry for 30 June 2010?

Accepted Answer

The premium paid on the option is an investment. At the year-end, the investment is marked to market, resulting in a loss of $4,500.

Question 8

Which of the following statements is correct?

Accepted Answer

All the statements are correct. The writer of a call option receives a premium (fee) from the buyer for taking on the obligation to sell shares at a specified price if the buyer exercises the option. The writer may or may not have to sell the shares, depending on whether the option is exercised. If the option is exercised, the writer is obligated to sell the shares at the agreed price.

Question 9

Explain the respective rights and obligations of:
(a)the buyer of a call option over shares
(b)the writer (seller)of a call option over shares
(c)the buyer of a put option over shares
(d)the writer (seller)of a put option over shares

Accepted Answer

The answer of Explain the respective rights and obligations of:
(a)the...

Question 10

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $\$ 100000$ 10% treasury bonds is $3.50.On 31 July 2010,Corine Ltd sold the option for $4.00.What are the journal entries to record this transaction?

Accepted Answer

The correct journal entry reflects the sale of the option for $40,000, recognizing a gain of $5,000 over the initial investment cost of $35,000. The initial investment was $39,500 (10 bonds * $3,950), and it was adjusted to $35,000 at year-end due to a decrease in the option's value. The sale at $4,000 per bond (10 bonds * $4,000 = $40,000) results in a gain.

Quiz 13: Accounting for Financial Instruments

What is meant by an 'interest rate swap'? Illustrate your answer with a simple example of how such a swap operates and how it would affect the parties concerned.Why might businesses engage in an interest rate swap?

A buyer of a futures contract:

An 'interest rate swap' generally involves:

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $100 000 10% treasury bonds is $3.50. What was the initial journal entry to record the option?

The buyer of a put option on shares:

Discuss the disclosure requirements in AASB 7 Financial Instruments Disclosure and AASB 132 Financial Instruments Presentation.

Corine Ltd,a trader bought a December put option for 10 $100 000 10% treasury bonds at a premium of $3.95 on January 1,2010.Year end for Corine is 30 June when the price for a December put option for $100 000 10% treasury bonds is $3.50. What would be the journal entry for 30 June 2010?

Which of the following statements is correct?

Explain the respective rights and obligations of: (a)the buyer of a call option over shares (b)the writer (seller)of a call option over shares (c)the buyer of a put option over shares (d)the writer (seller)of a put option over shares