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When you open a cap/floor contract, the system performs the following processing:

  • Calculates and stores the Local and Base Premium of the contracts. Some contracts do not have a premium paid or received (zero cost).

  • Calculates any applicable traded interest.

  • Creates an inventory position for the number of contracts. Buy to Open transactions are Long in inventory. Sell to Open (short sells) are Short in inventory.

  • Uses the quantity of the open contract as the first period's notional amount to price and accrue interest on.

  • Updates the general ledger with the cost of the contracts and the payable or receivable for the contracts.

The following information is specific to cap/floor processing:

  • If a cap is sold short to open, the entity receives the premium, but it takes on the liability of paying out interest. If a floor is sold short, the entity receives the premium, but it takes on the liability of paying out interest.

  • The premium paid or received for a cap contract is always paid in full at the start of the contract (up front). Premium for a cap or floor contract is never paid periodically over the life of the contract.

  • The premium paid or received for a cap contract, or a floor contract is amortized as income or expense over the life of the contract.

Calculation for Open Cap/Floor Transaction

...

Local Currency = Settle Currency = Base Currency:

Debit/Credit

G/L Account Name

G/L Account Number

Debit

Cost of Investments

1010000100

Debit

Investment Interest Receivable

1007000500

Credit

Investment Payable

2002000100


Local Currency = Settle Currency ≠ Base Currency:

Debit/Credit

G/L Account Name

G/L Account Number

Debit

Cost of Investments (Local)

1010000100

Debit

Investment Interest Receivable (Local)

1007000500

Credit

Payable for Investments Purchased (Local)

2002000100

Debit

Cost of Investments (Base)

1010000100

Debit

Investment Interest Receivable (Base)

1007000500

Credit

Payable for Investments Purchased (Base)

2002000100


For a Sell to Open (Event Type = Write) or if Net Cap/Floor is set to Yes and Opening Transaction is a Sell

Local Currency = Settle Currency = Base Currency:

Debit/Credit

G/L Account Name

G/L Account Number

Debit

Investment Receivable

1002000100

Credit

Cost of Investments

1010000100

Credit

Investment Interest Payable

2004000400


Local Currency = Settle Currency≠ Base Currency:

Debit/Credit

G/L Account Name

G/L Account Number

Debit

Investment Receivable (Local)

1002000100

Credit

Cost of Investments (Local)

1010000100

Credit

Investment Interest Payable (Local)

2004000400

Debit

Investment Receivable (Base)

1002000100

Credit

Investment Interest Payable (Base)

2004000400

Credit

Cost of Investments (Base)

1010000100