9.4.2.1 European Option Deals with Option Style Premium

In the earlier topic, we had a look at the sample accounting entries that were triggered during the EOD processing of future deals. We will now have a look at the accounting entries that will get triggered during BOD and EOD, processing for Option deals with Option and Future style premium.

The Instrument involved in all the European option deals is CME-90dayUSTbill-96-Option-Call. The details of this instrument are given below:

Instrument Details - CME-90dayUSTbill-96-Option-Call

Table 9-24 Field Values

Field	Values
Instrument Product	BNEO
Instrument Type	Option
Underlying Asset Type	Bonds
Nature of Underlying Asset	Real
Underlying Asset	90 Day T-Bill US
Underlying Asset Currency	USD
Call Put Indicator	Call
Instrument ID	CME90DTB-CL-E-0P
Instrument Series	96 Nov-00
Instrument Description	BondsOption90 Day T-Bill USCME96 Nov-00
Instrument Start Date	28-Aug-2000
Instrument Expiry Date	24-Nov-2000
Pricing Currency	USD
Contract Size	100
Contract Size Unit	T-Bill
Pricing Precision	4 Decimals
Instrument Pricing Size	1
Instrument Pricing Size Unit	Unit
Instrument Pricing Size Multiple	100
Underlying Pricing Size	1
Underlying Pricing Size Unit	T-bill
Underlying Pricing Unit Multiple	100
Underlying Price Code	CME
Min Price Movement	0.01
Max Price Movement in a Day	Nil
Max Long Position Customer	10000
Max Short Position customer	10000
Max Long Position Self	100000
Max Short Position Self	100000
Default Broker ID	CITI
Issuer Exchange	CME
MSTL Days	1
Physical Settlement Days	2
Initial Margin per Open Long	Nil
Initial Margin per Open Short	10%
Clearing House	NSCC
Margin CCY	USD

The details of the basket involved in the option deals in our example are as follows:

Table 9-25 Field Values

Field	Values
Basket Reference Number	BSK002
Portfolio ID	PF001
Instrument ID	CME90DTB-CL-E-0P
Series ID	96/Nov-00
Broker ID	CITI
Broker Account	CB001

Deal I – Reference Number D10103

Table 9-26 Nature of Contract - Open Long European Call with Option Style Premium on Own Account

Field	Values
Deal Number	D10103
Deal Type	LS
Deal Product	DP03
Instrument ID	VCME90DTB-CL-E-0P
Instrument Series	96/Nov-00
Strike Price	96
Buy/Sell	B
Booking Date	21-Nov-2000
Value Date	21-Nov-2000
Trade Rate	1.95
Premium Style	Option
No. of Contracts	200

As a result of processing this deal, the system creates a basket BSK002 with the following combination:

PF001 + CME90DTB-CL-E-0P + 96/Nov-00 + CITI + CB001

The basket will be created with a balance of 80 Long contracts.

At EOD, the event that needs to be processed in the Basket because of this Deal is EOLG. The accounting entries posted for this event are as follows:

Table 9-27 Accounting Entries

Accounting Role	Dr/Cr Indicator	Currency	Amount	Description
Contingent Asset	Debit	USD	1940000	Bought Asset Value
Contingent Asset offset	Credit	USD	1940000
Premium Paid	Debit	USD	15600	Deal Premium
Settlement Bridge	Credit	USD	15600

For the event ERVL, the following entries will be posted:

Table 9-28 Accounting Entries

Accounting Role	Dr/Cr Indicator	Currency	Amount	Description
Unrealized Expense	Debit	USD	160	Notional Loss on Reval
Reval Liability	Credit	USD	160

Deal II –Reference Number D10201

Table 9-29 Nature of Contract - Open Long European Call with Option Style Premium on Own Account

Field	Values
Deal Number	D10201
Deal Type	LS
Deal Product	DP03
Instrument ID	CME90DTB-CL-E-0P
Instrument Series	96/Nov-00
Strike Price	96
Buy/Sell	B
Booking Date	22-Nov-2000
Value Date	22-Nov-2000
Expiry Date	24-Nov-2000
Trade Rate	1.9
Premium Style	Option
No. of Contracts	20

The balance in the basket before processing this deal was 80 Long contracts. Since we are processing a long deal, the current balance in the basket will go up to 100 Long contracts.

At EOD, the event that needs to be processed in the Basket because of this Deal is EOLG. The accounting entries posted for this event are as follows:

Table 9-30 Accounting Entries

Accounting Role	Dr/Cr Indicator	Currency	Amount	Description
Contingent Asset	Debit	USD	192000	Bought Asset Value
Contingent Asset offset	Credit	USD	192000
Premium Paid	Debit	USD	3800	Deal Premium
Settlement Bridge	Debit	USD	3800

ERVL is triggered and the following entries are posted:

Table 9-31 Accounting Entries

Accounting Role	Dr/Cr Indicator	Currency	Amount	Description
Reval Asset	Debit	USD	192000	Bought Asset Value
Unrealized Gain	Credit	USD	192000

Deal II –Reference Number D10402

Table 9-32 Nature of Contract – Auto Exercise of Long position in an In the Money European Call on Expiry.

Field	Values
Deal Number	D10402
Deal Type	LS
Deal Product	DP03
Instrument ID	CME90DTB-CL-E-0P
Instrument Series	96/Nov-00
Strike Price	96
Booking Date	27-Nov-2000
Value Date	24-Nov-2000
Expiry Date	21-Nov-2000
No. of Contracts	100

The current balance in the Basket is 100 long contracts. Since the instrument expires on 24-Nov-00, all 100 contracts within the basket will cease to exist on the Expiry Date.

The accounting entries that are posted for the settlement of exchange of physicals on contract expiry will be as follows:

Table 9-33 Event Code - EXRL

Accounting Role	Dr/Cr Indicator	Currency	Amount	Description
Contingent Asset Offset	Debit	USD	960000	Increase in Contingent Asset
Contingent Asset	Credit	USD	960000
Control	Debit	USD	19400
Premium Paid	Credit	USD	19400
Settlement Bridge	Debit	USD	18000	Spot Strike Difference
Control	Credit	USD	18000
Expense	Debit	USD	1400	Loss on Exercise
Control	Credit	USD	1400