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  • Option Contracts: (Other Terminologies Please Read On Your Book)

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    Jaycel Paez
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    An option contract gives the buyer the right, but not the obligation, to buy or sell an asset at a future date at an agreed upon price. There are call options, which give the right to buy, and put options, which give the right to sell. The holder has the right to exercise the option, while the writer grants this right. Intrinsic value is the amount the asset is worth above or below the strike price. Time value is the portion of the option's fair value above its intrinsic value. For foreign currency options, the intrinsic value is calculated as the difference between the spot market price and strike price multiplied by the notional amount.

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    An option contract gives the buyer the right, but not the obligation, to buy or sell an asset at a future date at an agreed upon price. There are call options, which give the right to buy, and put options, which give the right to sell. The holder has the right to exercise the option, while the writer grants this right. Intrinsic value is the amount the asset is worth above or below the strike price. Time value is the portion of the option's fair value above its intrinsic value. For foreign currency options, the intrinsic value is calculated as the difference between the spot market price and strike price multiplied by the notional amount.

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    © All Rights Reserved
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    29 vizualizări2 pagini

    Option Contracts: (Other Terminologies Please Read On Your Book)

    Încărcat de

    Jaycel Paez
    An option contract gives the buyer the right, but not the obligation, to buy or sell an asset at a future date at an agreed upon price. There are call options, which give the right to buy, and put options, which give the right to sell. The holder has the right to exercise the option, while the writer grants this right. Intrinsic value is the amount the asset is worth above or below the strike price. Time value is the portion of the option's fair value above its intrinsic value. For foreign currency options, the intrinsic value is calculated as the difference between the spot market price and strike price multiplied by the notional amount.

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    din 2

    OPTION CONTRACTS

    An option contract between two parties (buyer and seller) gives the buyer the right to buy, but not the
    obligation, to purchase or sell something to the option seller at a future date at a price agreed to at the
    time the option contract is exchanged

    Call – option to buy


    Put – option to sell
    Holder – party having the right to buy or sell
    Purchased Option – option contract at holder’s POV
    Writer – party that grants the holder the contractual right
    Written Option – option contract at writer’s POV
    Intrinsic Value (IV) – Spot market price less exercised strike price
    Notional Amount – number of units (qty) that is specified in the derivative instrument, to determine its
    total peso value, traceable to movement or changes in the underlying.

    *(other terminologies please read on your book)

    Foreign Currency Option Situations:


    Spot Market Price (SMP)
    Strike Price (SP)

    Option SMP = SP SMP > SP SMP < SP


    Call (buy) At the money In the money Out of the money
    Put (sell) At the money Out of the money In the money

    *In the money – the holder would exercise the option since it is favorable to him
    *Out of the money – the holder would not exercise the option since it is unfavorable to him

    Example #1:
    On November 2, 2019, AA Philippines took delivery from a Chinese firm of inventory costing 100,000
    yuan. Payment is due on January 30, 2020. Concurrently, AA Philippines paid P900 cash to acquire a 90-
    day call option for 100,000 yuan.

    in peso 1 Nov 2019 31 Dec 2019 30 Jan 2020


    Spot rate (market price) 1.20 1.22 1.23
    Strike price (exercise price) 1.20 1.20 1.20
    Fair value of call option 900.00 2,200.00 3,000.00

    Notional Amount = 100,000 yuan

    Intrinsic value = (Spot Rate 12/21/19 – Exercise Price)*Notional Amount


    IV = (1.22 - 1.20)*100,000
    IV = 2,000

    Time Value = FV of Option – intrinsic Value


    TV = 2,200 – 2,000
    TV = 200
    ForEx Gain (Loss) on Option Contract:

    1 Nov 2019 31 Dec 2019 30 Jan 2020


    Intrinsic Value (SMP > SP); SMP-SP - 2,000.00 3,000.00
    Time Value (FV-IV) 900.00 200.00 -
    Gain or (Loss) Change in TV -700.00 excluding time value
    Gain or (Loss) Change in IV - 200.00 - excluding time value
    ForEx Gain (Loss) 1,300.00 including time value

    Forex Gain (Loss) on Hedge Item: Forex Gain (Loss) on Option Cntract

    Spot Rate 11/01/19 1.20 FV of Option @ Inception 900.00


    Spot Rate 12/31/19 1.22 FV of Option 12/31/19 2,200.00
    Decrease in SR -0.02 Forex Gain 12/31/19 1,300.00
    *Notional Amt 100,000.00
    Forex Loss 12/31/19 - 2,000.00 NET FOREX GAIN (LOSS) 2019 - 700.00

    Spot Rate 12/31/19 1.22 FV of Option 12/31/19 2,200.00


    Spot Rate 01/30/19 1.23 FV of Option 01/30/20 3,000.00
    Decrease in SR -0.01 Forex Gain 01/30/20 800.00
    *Notional Amt 100,000.00
    Forex Loss 01/30/20 - 1,000.00 NET FOREX GAIN (LOSS) 2019 - 200.00

    *Study the journal entries on your book*

    Speculations same as that of forward contracts

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