CHAPTER 6

Accounting for Equity Index Futures

LEARNING OBJECTIVES

After studying this chapter, you should have a grasp of the following:

  • Trade life cycle of exchange-traded equity index futures.
  • Journal entries to be recorded during the different phases of the trade life cycle.
  • FX revaluation and FX translation process for these trades.
  • Illustration of trades in long index futures with FX translation.
  • Preparation of general ledger accounts.
  • Preparation of income statement and balance sheet after the equity futures trades are done.
  • Illustration of trades in short index futures with FX translation.

THE TRADE LIFE CYCLE FOR EQUITY INDEX FUTURES

  • Pay the initial margin on index futures to the exchange.
  • Buy the index futures.
  • Pay the brokerage/commission on the buy transaction.
  • Pay the margin amount for the index futures.
  • Ascertain the fair value at the end of the reporting period.
  • Pay margin call.
  • Sell the index futures and pay brokerage.
  • Ascertain the profit/loss on the sale.
  • Reversal of margin money.
  • Expiry of index futures.
  • Receive the consideration.
  • FX revaluation entries.
  • FX translation entries.

Pay the Initial Margin on Index Futures to the Exchange

Margin is payable to the exchange if the investor either buys or sells a futures contract. For futures, since the stock exchange has the responsibility of ensuring that both the legs of the transaction are complete, the exchange would insist on a deposit of a percentage of the value of the contract as margin money. The margin ...

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