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 ...
