On May 1,20x1,Usstar purchased a put option to sell £50,000 on April 30,20x2 at a strike price equal to $2,which was the spot rate on May 1,20x1. Usstar paid a premium of $0.01 per pound. How should the option be recorded on May 1,20x1?

Question

Quizplus · Accepted Answer

The option should be recorded as an asset at the cost of the premium paid. The premium is $0.01 per pound for £50,000, totaling $500. Therefore, the correct entry is to debit FOREIGN CURRENCY OPTION for $500.

On May 1,20x1,Usstar Purchased a Put Option to Sell £50,000