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

Author:R. Venkata Subramani
Language: eng
Format: epub
Publisher: Wiley
Published: 2011-10-09T16:00:00+00:00

EXERCISES

Objective Questions

1. If the put option is purchased for speculative trade, then the premium paid towards purchase is treated as

a. Income

b. Expense

c. Gain

d. None of the above

2. For put options, the premium received towards sale is treated as

a. Income

b. Expense

c. Gain

d. None of the above

3. If a put option is purchased purely as a speculative trade, then the premium paid towards purchase of the put option is

a. Treated as revenue

b. Treated as margin

c. Treated as an asset

d. Treated as an expense

e. Treated as part of the cost

4. For exchange-traded options, since the stock exchange has the responsibility of ensuring that both the legs of the transaction are complete, the exchange would insist that the writer of the option

a. Deposit the total value of the contract amount as collateral

b. Pay a percentage value of the contract amount as premium

c. Deposit a percentage value of the contract amount as margin

d. Pay a percentage value of the brokerage amount as premium

e. Receive the margin amount from the counterparty

5. Assuming an investor writes a put option, he need not pay the brokerage because he is actually selling an option. Which of the following statements justifies that the above context is true or false?

a. True—since the investor receives a premium amount, he should receive the brokerage

b. False—the investor has to pay the commission to the exchange

c. True—because there are no brokers in between, no brokerage has to be paid

d. False—since the trade is exercised through a broker, the investor has to pay the commission

e. None of the above

Journal Questions

For each of the following scenarios, prepare journal entries, general ledger, trial balance, income statement, and balance sheet.

Long Put, Non-hedging—Functional Currency US$

Cloud Fund had the following trades in Sun in the options market through David Brother Brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of the contract as margin money throughout the life of the contract. On January 1, Cloud Fund introduced $100,000 as capital.

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