Accounting for Equity Put Options
After studying this chapter you should have a grasp of the following:
- The trade life cycle of exchange-traded options (ETOs) for long put.
- Journal entries to be recorded during the different phases of the trade life cycle.
- FX revaluation and FX translation process.
- Illustration of long put options in both functional and foreign currency, including preparation of journal entries, general ledger accounts, income statement, and balance sheet for long put option.
- The trade life cycle of exchange-traded options on writing a put option, and journal entries to be recorded during the different phases of this trade life cycle.
- Illustration of writing put options in functional currency, including preparation of journal entries, general ledger accounts, income statement, and balance sheet after writing the put options.
TRADE LIFE CYCLE FOR EXCHANGE-TRADED OPTIONS—LONG PUT, NON-HEDGING
If the put is purchased purely as a speculative trade, then the premium paid towards purchase of the put option is taken to the expense and the premium received on sale of the option is treated as revenue. However, the value of the option is written back on the valuation date and shown as an asset in the case of purchase of put options. The trade life cycle events for put options that are not meant as hedging instruments are as follows:
- Buy the put options.
- Brokerage/commission on the buy transaction.
- Pay for the put options bought.
- Ascertain ...