Advanced Financial Accounting Option Requirement

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
Name of the University:
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ADVANCED FINANCIAL ACCOUNTING
1
Table of Contents
Question 2:.................................................................................................................................2
Question 3:.................................................................................................................................4
Question 4:.................................................................................................................................4
References and Bibliography:....................................................................................................7

ADVANCED FINANCIAL ACCOUNTING
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Question 2:
Requirement (a):
A call option provides the holder the right and not the obligation to buy 100 shares of
a specific underlying stock at a particular strike price on the expiration date of the option
(Bacha, 2017). According to AASB 9, options are identified in the form of derivative
instruments, which imply that the prices are obtained from the price of another security. In
the provided case, the options contract creates a financial instrument, which provides Black
Limited the right to acquire 100,000 shares in Orange Limited for $1.50 per share and this
leads to obligation for White Limited to sell 100,000 shares in Orange Limited to Black
Limited for $1.50 per share.
From the perspective of Black Limited, the presence of financial asset could be seen.
The contract provides Black Limited the right of exchanging financial assets under
conditions, which are potentially favourable. If the price of the shares of Orange Limited
exceeds $1.50, Black Limited would exercise the options for earning profit. On the other
hand, the worst case scenario would be the fall of exercise price below $1.50, as it would be
out of the money. Under such situation, Black Limited would allow lapse of the options and it
would simply lose the original payment of $50,000 ($100,000 x $0.50).
From the perspective of White Limited, the presence of financial liability could be
seen. White Limited has entered into a contract to exchange financial assets under conditions,
which are potentially unfavourable to the organisation. For instance, if the shares in Orange
Limited rise to $2.50, White Limited would be needed to acquire 100,000 shares from the
market at $2.50 each, after which the same would be sold to Black Limited for $1.50 each.