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  • Foreign Currency Option Situations: Apple Mangcoy

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    Apple Mangcoy
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    1) There are three situations for foreign currency options based on the relationship between the spot price and the exercise price: in the money, at the money, and out of the money. 2) For option premiums, the entire premium is considered the time value if the option is at the money or out of the money at inception. For in the money options, the incremental premium above the difference between spot price and exercise price is the intrinsic value. 3) In the balance sheet, options are presented as assets if held and liabilities if written. For out of the money or at the money options, the asset or liability is only for the time value. For in the money options, it is for

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    1) There are three situations for foreign currency options based on the relationship between the spot price and the exercise price: in the money, at the money, and out of the money. 2) For option premiums, the entire premium is considered the time value if the option is at the money or out of the money at inception. For in the money options, the incremental premium above the difference between spot price and exercise price is the intrinsic value. 3) In the balance sheet, options are presented as assets if held and liabilities if written. For out of the money or at the money options, the asset or liability is only for the time value. For in the money options, it is for

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    7 views6 pages

    Foreign Currency Option Situations: Apple Mangcoy

    Uploaded by

    Apple Mangcoy
    1) There are three situations for foreign currency options based on the relationship between the spot price and the exercise price: in the money, at the money, and out of the money. 2) For option premiums, the entire premium is considered the time value if the option is at the money or out of the money at inception. For in the money options, the incremental premium above the difference between spot price and exercise price is the intrinsic value. 3) In the balance sheet, options are presented as assets if held and liabilities if written. For out of the money or at the money options, the asset or liability is only for the time value. For in the money options, it is for

    Copyright:

    © All Rights Reserved
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    of 6

    Foreign Currency

    OPTION SITUATIONS
    Apple Mangcoy
    Spot Price = Spot Price > Spot Price <
    Option Exercise Price Exercise Price Exercise Price
    Call or Buy At the money In the money Out of the money
    Put or Sell At the money Out of the money In the money

    Spot Price is the market price


    Exercise price or strike price refers to the option price
    Accounting for Foreign Currency
    Option Premiums

    If at the inception of foreign currency option is

    AT the money or OUT of the money

    Entire premium is called the TIME VALUE.


    Accounting for Foreign Currency
    Option Premiums
    If at the inception of foreign currency option is

    In of the money

    option holder will have a higher premium the


    incremental amount equaling the difference between the
    spot price and exercise price.
    This incremental premium paid is called the INTRINSIC
    VALUE.
    How option are reported in the
    Balance Sheet
    Presentation of an Presentation of an
    unexpired portion unexpired portion
    contract in the contract in the
    option holders option writers
    Option is: balance sheet balance sheet
    Out of the Asset (time value only) Liability
    money
    At the money Asset (time value only) Liability
    In the money Asset (intrinsic + time Liability
    value)
    The option buyer will never suffer any loss (other than
    the option premium paid) because the option buyer has
    no obligation to exercise the option when it is out-of-the
    money or at-the-money.

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