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Accounting for Investments, Equities, Futures and Options, Volume 1 by R. Venkata Subramani

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CHAPTER 10

Equity Options: Hedge Accounting

LEARNING OBJECTIVES

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

  • Accounting standards for derivative instruments and hedging activities.
  • Differences between U.S. GAAP and IFRS pertaining to hedge accounting relative to options.
  • Cornerstones of FAS 133; definitions of underlying, notional amount, payment provision, and initial net investment.
  • Contracts that are exempted from FAS 133.
  • Recognition and measurement of derivatives and hedged items.
  • Accounting for changes in fair value and treatment of gains and losses on derivative instruments.
  • Criteria for hedge accounting.
  • Eligibility for designation as a hedged item.
  • Accounting for gains and losses on a fair value hedge.
  • Discontinuation of hedge accounting.
  • Features of accounting standards relating to options as hedge, written options, covered call, and the rationale behind the symmetry requirement for hedges.
  • Exception to single fair value measure rule.
  • Whether hedge accounting is possible for a delta-neutral hedging strategy.
  • When hedge accounting is permissible for option contracts.
  • The trade life cycle of exchange-traded options (ETOs) for long put held as hedging.
  • Journal entries to be recorded during the different phases of the trade life cycle.
  • FX revaluation and FX translation relating to this trade life cycle.
  • Illustration of long put options as hedge in functional currency.
  • Preparation of journal entries and general ledger accounts.
  • Preparation of income ...

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