Aggie Oil has the following financial instruments at the end of 2017 with one co
ID: 1171975 • Letter: A
Question
Aggie Oil has the following financial instruments at the end of 2017 with one counterparty. The instruments are used to hedge fluctuations in price that would impact the sales price of future inventory. All hedges are considered to be 95% effective.
Strike Price
Market Price
Current Black- Value (12/31/2017)
Previous Black- Value (9/30/2017)
Short call
Long put
Short future
At September 30, 2017, the market price was $7.00. What gain or loss would be added to net income for the financial instruments on December 31, 2017 (the entry, not the total in the account at year end)? ROUND ALL ANSWERS TO WHOLE DOLLARS.
Strike Price
Market Price
Current Black- Value (12/31/2017)
Previous Black- Value (9/30/2017)
Short call
300,000 $6.35 $6.50 213,960 356,280Long put
300,000 $5.75 $6.50 9,960 3,570Short future
100,000 $7.25 $6.50 N/A N/AExplanation / Answer
For short call, premium received=3,00,000*6.35=$19,05,000
If market price is $7.00 at 30th September, then call lapses, payoff is NIL.
Net gain from short call=$19,05,000
For long put, premium paid=3,00,000*5.75=$17,25,000
If market price is $7.00 at 30th September, then put is exercised in our favour. Gain=(7-6.5)*3,00,000=$1,50,000
Net loss from long put=$(17,25,000-1,50,000)=$15,75,000
For short future, gain=1,00,000*(7-6.5)=$50,000
Net gain=$(19,05,000-15,75,000+50,000)=$3,80,000