DERIVATIVES PROBLEM L

On January $10,2023,$ KarmaCorp purchased a call option for $$280$ on Terse common stock

with the goal of making a few dollars; KarmaCorp predicted that the Terse stock price would

rise over the time period of the call option $($about six months$).$ The call gives KarmaCorp the

option to buy $10$ shares of Terse at a strike price of $$700$ per share. The market price of a

Terse share is $$700$ on January $10,2023.$ On March $31,2023,$ the stock price for Terse is

$$750$ a share. On that date the time value of the option is $$130.$

REQUIRED:

a$.$ Record the entries at January $10$ and March $31.$ What will appear on the balance sheet

and income statement at March $31($income statement for January $10$ through March $31).$

What will appear on the statement of cash flows $-$ direct method $-$ for January $10$ through

March $31?$

b$.$ Now assume it is June ${30}^{th}$ and the time value of the option is zero. The Terse common

stock price is $$1000$ a share. What entries to make on June ${30}^{th},$ and what will appear on

the balance sheet, income statement $($for $6$ months ending June $30),$ and SCF direct

method?

c$.$ Assume cash settlement of the option on June $30$th$,$ record that transaction.

d$.$ Instead of the facts above, assume that the Terse common stock price falls to $$225$ on

March ${31}^{st},$ and falls to $$100$ on June ${30}^{th}.$ How would you answer questions a$-$c in this

scenario?