This is a disclosure from Southwest Airline’s recent 10-K: “ The fair value of fuel option contracts are determined using option pricing models with inputs about commodity prices, strike prices, risk-free interest rates, term to expiration, and volatility. The Company has categorized these option contracts as Level 3 fair value measures”. Why would these fuel option contracts be assigned as Level 3 (instead of Level 1 or Level 2) in the footnote disclosure?

This is a disclosure from Southwest Airline’s recent 10-K: “ The fair value of fuel option contracts are determined using option pricing models with inputs about commodity prices, strike prices, risk-free interest rates, term to expiration, and volatility. The Company has categorized these option contracts as Level 3 fair value measures”. Why would these fuel option contracts be assigned as Level 3 (instead of Level 1 or Level 2) in the footnote disclosure?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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20. A futures contract a. is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. b. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the epiration date of the contract. c. gives the buyer the right,, but not the obligation, to buy an asset some time in the future. d. is a contract to be signed in the futurue by the buyer and the seller of the commodity e. none of these.
In the context of financial derivatives, what is a futures contract? A) An agreement to exchange assets at a predetermined price and date. B) A contract that grants the holder the right, but not the obligation, to buy or sell an asset. C) A contract to buy or sell a specific quantity of an asset at a future date at a price specified today. D) A contract that provides regular interest payments and returns the principal at maturity.
8) Most futures contracts are closed by a. Delivery of the underlying asset. b. Placing an offsetting order. c. Exercise of the embodied option. d. Default. e. none of the above. 9) Which of the following is not a forward contract? a. a long-term employment contract at a fixed salary. b. an automobile lease non-cancellable for three years. c. a down payment to rent an apartment. d. a signed contract to buy a house in six months. e. none of the above. 10) In a futures marking-to-market, when the trader receives a margin call, the amount he must deposit is called: a. the initial margin. b. the maintenance margin. c. the variation margin. d. the margin balance. e. none of the above. 11) If the initial margin of a futures contract is $5,000 and the maintenance margin is $3,500, how much must you deposit at the start of the contract? a. $5,000 b. $3,500 c. $8,500 d. $0.000 e. none of the above. 12) If the initial margin is $5,000, the maintenance margin is $2,500 and your margin balance is…
Current GAAP recommends that the fair value method be used to account for compensatory stock option plans. From a conceptual point of view, this method is an improvement over the intrinsic value method. Required: Explain how the fair value method is an improvement over the intrinsic value method.
The seller (or the writer) of a call option: may have the obligation to sell the underlying asset at a strike price until an expiration date may have the obligation to buy the underlying asset at a strike price until an expiration date has the right to sell the underlying asset at a strike price until an expiration date has the right to buy the underlying asset at a strike price until an expiration date None of these answers are correct.
Q9. How would you hedge the risk of a price rise using a derivative? Group of answer choices 1. You would take out a spot contract to sell the underlying. 2. You would take out a forward contract to sell the underlying. 3. You would take out a spot contract to buy the underlying. 4. You would take out a forward contract to buy the underlying.
i)identify, analyze and discuss the following characteristics of an American put option: maximum value, intrinsic value, time value, lower bound, and payoff at expiration. ii) analyze and discuss the following factors on an American put option: time to expiration, exercise price, interest rate, volatility, and dividends. iii) identify, analyze, and discuss the following characteristics of a European call option: maximum value, intrinsic value, time value, lower bound, and payoff at expiration. iv) analyze and discuss the following factors on a European call option: time to expiration, exercise price, interest rate,
True/false An option is a financial contract that gives the owner the right to buy or sell some asset at a fixed price on or before a given date. The put-call parity is derived based on the principal of no arbitrage. That is, the put-call parity equation holds only when the market is reasonably good enough so that arbitrage opportunities are not allowed. Today Jim bought a call option and Jill wrote a call option. The options are exactly the same (with the same underlying asset, same exercise price, same expiration date, same in every aspect). When the underlying stock price changes, for every dollar Jim gains, Jill loses a dollar, and vice versa. In reality, stock option contracts are based on the unit of 100 shares and expire on the third Friday of the month. An out of the money option means that if you exercise the option now you will be able to get money out of it.
What is an option? OA) A contract that is derived from some other underlying quantity, index, asset or event. B) A contract that gives the holder the right to buy or sell something at a specified price. C) A contract that gives the holder the right to sell an instrument at a pre- specified price. D) A contract that gives the holder the right to acquire an instrument at a pre- specified price.
Which of the following statements about European option contracts is TRUE? a. Typically American options are cheaper than otherwise similar European options due to the uncertainty regarding the date of exercise. b. One can synthesise a long forward position in the underlying by being long a call and short a put c. A long call position and a short put position both involve buying the underlying and so are equivalent d. The price of an option can be obtained by computing the true probabilities of each state of nature, working out the expected option payoff across those states and then discounting back to the present.
a)analyze and discuss the following factors on a European call option: time to expiration, exercise price, interest rate, volatility, and dividends. b) identify, analyze, and discuss the following characteristics of a European put option: maximum value, intrinsic value, time value, lower bound, and payoff at expiration. c) analyze and discuss the following factors on a European put option: time to expiration, exercise price, interest rate, volatility, and dividends. d) discuss the relationship between American and European option prices. e) derive the put-call parity and discuss its implications. f) discuss the characteristics of a currency option.
A European call option can be exercised a. any time in the future b. only on the expiration date c. if the price of the underlying asset declines below the exerciase price d. immediately after dividends are paid e. none of these.