Option value changes are classified as intrinsic value changes and time value changes. Assume a company designates changes in intrinsic value as the hedge, with changes in time value reported in income. For options used to hedge a forecasted sale of merchandise, when does the change in option intrinsic value impact income?

Question

Quizplus · Accepted Answer

The change in option intrinsic value impacts income when the merchandise sale is recorded. This is because the intrinsic value change is designated as the hedge, and its effectiveness is recognized in earnings in the same period the hedged forecasted transaction affects earnings.

Option Value Changes Are Classified as Intrinsic Value Changes and Time