On May 1, 2001, Ustar purchased a put option to sell £50,000 on April 30, 2002 at a strike price equal to $2, which was the spot rate on May 1, 2001. Ustar paid a premium of $0.01 per pound. How should the option be recorded on May 1, 2001?
A) Debit Foreign Currency Option for $100,500.
B) Credit Foreign Currency Option for $100,500.
C) Debit Foreign Currency Option for $500.
D) Debit Hedge Expense for $500.

Question

Quizplus · Accepted Answer

The option should be recorded as a debit (an asset) for the cost of the premium paid. The premium is $0.01 per pound for £50,000, which equals $500.

On May 1, 2001, Ustar Purchased a Put Option to Sell