Question 5 (20 marks)

1. ABC Ltd. issued an option to Mr. Wong for $2,000 on April 1, 2018. The option entitles Mr. Wong to buy 1,000 of XYZ Ltds ordinary shares at $10 per share at any time in the next 12 months. The market price of XYZs ordinary shares on April 1, 2018 was $12 per share; however, the current market price today is only $9 per share. [5 marks]

Required:

Determine the classification of ABCs financial instruments above. Justify your answer

2. On April 1, 2018, ABC Ltd. issued a financial instrument to Mr. Lee for $1,000,000. The rate of return is linked to the movement in gold price over the next twelve months. If, at any time in the next twelve months, the gold price is higher than HK$10,000 per ounce, Mr. Lee will receive 3% return on investment. Otherwise, the return on investment will be 0%. Mr. Lees investment and return on investment will be delivered to him on March 31, 2019. [5 marks]

Required:

Determine the classification of ABCs financial instruments above. Justify your answer