Accounting for Derivatives Comprehensive Guide (With Examples)

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While exercising and assigning options, or during expiry of options and futures only the price differential i. For options the price differential is the difference between the spot price of the underlying asset and the strike price of exchange traded options accounting entries instrument. For futures the price differential is calculated exchange traded options accounting entries the difference between the spot price of the underlying asset and the acquisition price of the instrument.

For every deal that is entered in the system a deal confirmation advice can be generated and sent to the portfolio customer. The ETD module interacts with the Margin Maintenance sub-system for the purpose of resolving money settlements exchange traded options accounting entries due to the various events processed in the ETD module. The margin maintenance module offers you the flexibility of netting all settlements for a counterparty Broker or Portfolio Customer.

For additional information about the sub-system refer to the Margin Maintenance user manual. E xchange Traded Derivatives — An Overview 2. This chapter contains the following sections: You can book contingent entries for the Long and Short positions opened during the day. You can define the premium exchange involved in Option Style Options, and book the premium amount. You have the facility to define and book the brokerage amount and charges involved in the deal.

Closing long and short positions: You can reverse contingent entries for all contracts that have been closed. You have the facility to calculate the closing gains and losses and book appropriate entries for the exchange traded options accounting entries. Revaluation of Futures and Options As part of the End of Day activities you can perform realized revaluation on futures and future style options based on the closing price of the instrument and the series. For option style options you can perform a Memo or Notional revaluation for the entire portfolio depending on the frequency that you choose to maintain.

Exercise of Options Facility to reverse the contingent entries exchange traded options accounting entries those contracts that have been exercised.

Facility to calculate the exercise gain based on the difference between the price of the underlying asset and the Strike Price of the instrument and book accounting entries for the same. Assignment of Options Facility to reverse the contingent entries for contracts that have been exercised. Facility to calculate the assignment loss based on the difference between the price of the underlying asset and the strike price of the instrument and book entries for the same.

Exchange of futures for physicals Facility to reverse the contingent entries while exchanging futures for physicals. Facility to calculate the exchange loss or gain based on the difference between the price of the underlying asset and the acquisition price and book entries for the same. Expiry of Options On the expiry date, if the series is Out of the Money, the system will process an automatic expiry for the series.

The system also calculates the expiry loss or gain depending on whether it is a long or short deal. Exchange traded options accounting entries respective accounting entries are also booked. Expiry of Futures In the case of futures, on the expiry date the system automatically exchanges futures for physicals. Note While exercising and assigning options, or during expiry of options and futures only the price differential i. You have the facility to define and book the charges involved in the deal.

You can calculate the closing gains and losses and book appropriate entries for the same. Revaluation Based on the closing price of the instrument and the series you can perform realized revaluation on futures and future style options on a daily basis as part of the end of day activities.

Exercise of Options You can book the premium for future style options. The difference between the Strike Price and the Underlying Asset Price is calculated and the appropriate accounting entries are exchange traded options accounting entries for the same.

Assignment of Options You can book the premium for future style options You can book the difference between the Price of the Underlying Asset and the Strike Price of the instrument and pass entries for the same. Exchange of futures for physicals You can book the difference between the price of the underlying asset and the acquisition price and book entries for the same. Expiry of Options As on the expiry date if the series is Out of the Money, the system will process an automatic expiry for the series.

Expiry of Futures In the case of futures with future style options the system automatically books the deal premium amount.

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A call option is the right, but not an obligation to buy something at a fixed price — the strike price at anytime within the specified time period. The underlying is usually either an exchange traded stock or a commodity.

Note that an option gives the buyer the right to buy or sell the underlying contract at a predetermined price. The specific price at which the underlying can be bought or sold is referred to as the strike price or exercise price of the option. Options only have a limited life-span. In the above definition of an option the buyer of an option can exercise the right within a specified time period.

The exercise period of the option specifies when the option expires and can no longer be traded. The exact date in which the option expires is set by the exchanges and differs from one exchange to another. Different month options are entirely different instruments, so a June option is a separate and distinct contract from a July option. Investors buy call options if they think that the price of the underlying will go up and buy put options if they think the price of the underlying will go down.

The price paid for acquiring the right to buy is called the call option premium. Whether the investor has the right to buy or to sell depends on which type of option the investor buys.

The purchaser of a call option has the right to buy the underlying asset. The purchaser of a put option has the right to sell the underlying asset. Note that puts and calls are mutually exclusive. A call option does not offset a put option and vice versa. In the National Stock Exchange, India, the quotes are available for the current month, near month and far month. For example, when investors trade in early May, they get quotes for May, June and July.

The settlement period is the last Thursday of the relevant month. So, if an investor buys 1 lot of May-X1 — Rs. A put option is the right, but not an obligation to sell something at a fixed price — the strike price at anytime within the specified time period. The price paid for acquiring the right to sell is called the put option premium.

When the investor buys a put, then the investor has the right to sell the underlying. Note that the investor is dealing with different instruments here. The investor is buying a put instrument that gives the right to sell a different and distinct instrument which is the underlying asset. Components of an Equity Options Contract. This site rocks the Classic Responsive Skin for Thesis.

Call and Put Options by R. Venkata Subramani on March 5, Call Option A call option is the right, but not an obligation to buy something at a fixed price — the strike price at anytime within the specified time period. Put Option A put option is the right, but not an obligation to sell something at a fixed price — the strike price at anytime within the specified time period. Components of an Equity Options Contract Previous post: