Hedge accounting

Financial Reporting

Writing put option is not a hedging instrument. Like wise writing call option is a hedging instrument or not ? And why

Chandan Subudhi

CA Final

★ 12K+

17-Jun-24 12:59

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Answers (4)

When you write a put or call, there is a risk in case of adverse price movements. Hence technically not a hedge

CA Suraj Lakhotia

Admin

17-Jun-24 13:19

Let's assume an investor owns 1,000 shares of Reliance Industries, which are currently trading at ₹2,500 per share. The investor decides to write (sell) 10 call options (each option contract typically represents 100 shares) with a strike price of ₹2,700, expiring in one month. The premium received for each option is ₹50. For instance, if the stock price falls from ₹2,500 to ₹2,000, the investor faces a paper loss of ₹500,000 (₹500 per share * 1,000 shares). The premium received (₹50,000) only offsets a small portion of this loss.

CA Suraj Lakhotia

Admin

17-Jun-24 13:20

Only put option is mentioned here.

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Thread Starter

Chandan Subudhi

CA Final

★ 12K+

17-Jun-24 13:21

Thread Starter

Chandan Subudhi

Only put option is mentioned here.

Animation mistake. Thanks for highlighting. In video I have mentioned written option only. Will correct.

CA Suraj Lakhotia

Admin

18-Jun-24 10:18