1. Arens Company purchases a call option to hedge an investment of 20,000 shares of Braxton Company stock. The option agreement provides that if the prices of a share of Braxton Company stock is greater than $30 on October 25, Arens receives the difference (multiplied by 20,000 shares). Alternatively, if the price of the stock is less than $30, the option is worthless and will be allowed to expire. Which of the following statements regarding this call option is correct?

a. The call option is an option to sell Braxton Company stock at a fixed price.

b. The call option represents a speculative option rather than a hedge.

c. Arens could have purchased a put option or a call option to effectively hedge the investment in the shares of Braxton stock.

d. The call option effectively hedges the investment in the shares of Braxton stock.

2. Hope, Inc., enters into a call option contract with Baker Investment Co. on January 2, 2012. This contract gives Hope the option to purchase 1,000 shares of XYZ stock at $100 per share. The option expires on April 30, 2012. XYZ shares are trading at $100 per share on January 2, 2012, at which time Hope pays $100 for the call option. The call option would be recorded in the accounts of Hope as

a. a liability.

b. a gain.

c. would not be recorded in the accounts (memorandum entry only).

d. an asset.