B.1.3 Example III – Contingent Entries and Delta Accounting

This section is applicable only for physical currency options. Let us consider the following parameters of a deal.

Table B-46 Example III

Contract Type	Trade
Buy or Sell	Sell
Call or Put	Call
Contract Amount	1000
Contract Currency	USD
Counter Currency	GBP
Exchange rate b/n USD/GBP	1.5
Option premium	2500 INR
Booking Date	01
June	2002
Value Date	01
June	2002
Premium Pay Date	01
Jun	2002
Strike price	50 INR/USD
Current Spot Rate	52 INR/USD
Option Style	Plain Vanilla
Expiration Style	American
Earliest Exercise Date	15
Oct	2002
Barrier Type	Double Knock Out
Barrier	53 INR/USD
Lower Barrier	48 INR/USD
Rebate	100 AUD
Payment At	Maturity
Barrier Window Start Date	01
Sep	2002
Barrier Window End Date	01
November	2002
Maturity Date	31
Description	2002

Since the exchange rate between USD/GBP on inception is 1.5, the counter currency amount (Contract amount in counter currency) is 1000*1.5 = 1500 GBP.

On 01-Jun-2002 the booking event triggers with the following contingent entries.

Since the other entries have already been explained we are not explaining those entries again.

Suppose the LCY is INR. Let us assume the rate between USD/INR is 40 and GBP/INR 30.

The LCY amount for contract currency amount = 1000*40 =40000

LCY amount for Counter Currency amount = 1500*30 = 45000

Average LCY amount = (40000+45000)/2 = 42500

BOOK

Table B-47 Accounting Entries

Dr/Cr	Accounting Role	Amount Tag	FCY Amount	FCY/CCY	LCY AMT	Date
Dr	CON_WRI_CALL	WRI_CALL_AMT	1500	GBP	42500	01-Jun-02
Cr	CON_WRI_CAL_OFF	WRI_CALL_AMT_EQ	1000	USD	42500	01-Jun-02

Suppose the delta factor maintained for 01-Jun-2002 is 0.8. The delta amount is calculated as follows:

Counter Currency Amount * delta factor =1500*0.8 =1200 GBP.

At the end of the day when the batch process is run, the delta accounting entries are posted as follows:

Table B-48 DLTA

Dr/Cr	Accounting Role	Amount Tag	FCY Amount	FCY/CCY	Date
Dr	CON_DELTA_AC	DELTA_AMT	1200	GBP	01-Jun-02
Cr	CON_DELTA_OFF	DELTA_AMT	1200	GBP	01-Jun-02

Now on 2nd of June, when the batch process is run, the previous days delta entries are reversed. Suppose the delta factor maintained for 01-Jun-2002 is 0.6. The delta amount is calculated as follows:

Counter Currency Amount * delta factor = 1500*0.6 =900 GBP

Table B-49 DLTA

Dr/Cr	Accounting Role	Amount Tag	FCY Amount	FCY/CCY	Date
Dr	CON_DELTA_OFF	ANTI_DELTA_AMT	1200	GBP	02-Jun-02
Cr	CON_DELTA_AC	ANTI_DELTA_AMT	1200	GBP	02-Jun-02
Dr	CON_DELTA_AC	DELTA_AMT	900	GBP	02-Jun-02
Cr	CON_DELTA_OFF	DELTA_AMT	900	GBP	02-Jun-02

Suppose the option gets knocked out on 01-Sep-2002, the entries passed are as follows:

Table B-50 DLTA

Dr/Cr	Accounting Role	Amount Tag	FCY Amount	FCY/CCY	Date
Dr	CON_DELTA_OFF	ANTI_DELTA_AMT	900	GBP	01-Sep-02
Cr	CON_DELTA_AC	ANTI_DELTA_AMT	900	GBP	01-Sep-02

KNOT (Only contingent reversal is shown)

Assuming that the rates between USD/INR and GBP/INR have not changed for calculation of LCY amount. Any such change are taken care of by the account revaluation batch.

Table B-51 Accounting Entries

Dr/Cr	Accounting Role	Amount Tag	FCY Amount	FCY/CCY	LCY AMT	Date
Dr	CON_WRI_CAL_OFF	WRI_-CALL_AMT_EQ	1000	USD	42500	01-Sep-02
Cr	CON_WRI_CALL	WRI_CALL_AMT	1500	GBP	42500	01-Sep-02

The above example is only for a Written and Call physical currency option. For other Purchase/Written – Call/Put options, you can refer Annexure A for a list of accounting entries.