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Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a
Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X1, Mega purchases call options for 15,000 barrels of oil at $32 per barrel at a premium of $2 per barrel with a March 1, 20X2, call date. The following is the pricing information for the term of the call: Book Date Spot Price November 30, 20x1 $32 Futures Price (for March 1, 28x2, delivery) $33 Ask December 31, 20x1 33 34 March 1, 28x2 35 Prin ferences The information for the change in the fair value of the options follows: Date November 30, 20x1 December 31, 20x1 March 1, 20x2 Time Value $30,000 6.000 Intrinsic Value Total Value $30,000 15,000 45,000 21,000 45,000 On March 1, 20X2, Mega sells the options at their value on that date and acquires 15,000 barrels of oil at the spot price. On June 1, 20X2, Mega sells the oil for $36 per barrel. Required: a. Prepare the journal entry required on November 30, 20X1, to record the purchase of the call options. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
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