On May 1, 20x1, Ustar 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.Ustar paid a premium of $0.01 per pound.How should the option be recorded on May 1, 20x1?
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

DOn May 1, 20x1, the cost of the put option (premium paid) is $0.01 per pound for £50,000, which equals $500 (£50,000 * $0.01). This cost is recorded as a debit to increase the asset account (Foreign Currency Option) for the cost of the option. Additionally, recognizing the premium paid as an expense (Hedge Expense) is appropriate, reflecting the cost of hedging against currency fluctuations.

On May 1, 20x1, Ustar Purchased a Put Option to Sell