Chapter 17_ Appendix A Accounting for Derivative Instruments

Mr. Man is the owner of a local supermarket, Fresh Market Place. Due to the difficulties the company has experienced in the past two years, its earnings have been declining in this period. As such, Mr. Man is considering buying equity interest in a listed company in the fastgrowing ecommerce industry for Fresh Market Place. While concerned about the companys shortage of cash, Mr. Man wonders if there is a financial instrument which allows investment in the equity interest while requires little down payment. As Mr. Mans financial advisor, you are requested to address the following:

Q1) What financial instrument would you recommend to Mr. Man? Why?

Q2) What are the main distinctions between a traditional financial instrument and a derivative financial instrument?

Q3) Describe the principles in accounting for derivatives.

Q4) Explain how to calculate the intrinsic value of a call option if the underlying stock price never increases above the strike price.