On January 2, 2017, Jackson Corporation purchased a call option for $500 on Walter's common shares. The

Question:

On January 2, 2017, Jackson purchased a call option for $500 on Walter's common shares. The call option gives Jackson the option to buy 1,000 shares of Walter at a of $30 per share any time during the next six months. The market price of a Walter share was $30 on January 2, 2017 (the intrinsic value was therefore $0). On March 31, 2017, the market price for Walter stock was $42 per share, and the fair value of the option was $17,500.
Instructions
(a) Prepare the journal entry to record the purchase of the call option on January 2, 2017.
(b) Prepare the journal entry(ies) to recognize the change in the call option's fair value as at March 31, 2017.
(c) What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2017?
(d) Based on the available facts, explain whether the company is using the option as a hedge or for speculative purposes.
(e) Explain which financial risks the transaction exposes the entity to.
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...