Johnny B. Goode & Company signed a written call option agreement with Golden Oldies Entity. The contract stipulates that in exchange for providing services, Johnny B. Goode can call 2 million of Golden Oldies' common equity shares at a strike price of €2 each. The call option expires in two years. However the price of Golden Oldies' stock never rises above €1.50 over the two year period. Thus, Johnny B. Goode never exercises the call option. This agreement between Johnny B. Goode and Golden Oldies does not qualify as a financial instrument.

Question

Quizplus · Accepted Answer

The agreement qualifies as a financial instrument because it is a contract that gives Johnny B. Goode the right (but not the obligation) to buy Golden Oldies' equity shares at a predetermined price, which is a characteristic of derivative financial instruments.

Johnny B Goode & Company Signed a Written Call Option Agreement