Hall, Inc, Enters into a Call Option Contract with Bennett Investment

question 49

Multiple Choice

Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2011. This contract gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on April 30, 2011. WSM shares are trading at $100 per share on January 2, 2011, at which time Hall pays $100 for the call option.
Using the information above, the call option would be recorded in the accounts of Hall as

• A) an asset.
• B) a liability.
• C) a gain.
• D) would not be recorded in the accounts (memorandum entry only).

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Definitions:

Normally Distributed

A statistical distribution where data is symmetrically distributed around the mean, resembling the shape of a bell curve.

Straight Bond Value

The present value of future cash flows, such as interest payments and the return of principal, from a bond with no embedded options.

Convertible Bond

This bond offers the option to be exchanged for a set amount of the company's shares at various points during its term, often at the preference of the individual holding the bond.

Straight Bond Value

The value of a bond that pays fixed interest payments until maturity and repays the principal amount without any embedded options, traded purely on interest rate and credit quality.