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.
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Calculation for Open Cap/Floor Transaction
Eagle Accounting executes the following calculation for an open cap/floor transaction:
Local Premium Value (the Cost/Proceeds) to Open:
(Quantity * Quantity Scale) * (Price per Contract * Price Multiplier)
Base Premium Value:
Local Premium Value / Spot Exchange Rate to Base
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General Ledger Postings for Open Cap/Floor Transactions
When a contract is opened, the following general ledger postings are required.
For a Buy to Open
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
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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
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Open Transaction Information:
- Buy to Open
- Trade Date 01/04/02
- Entity is GBP based
- Security is USD based
- Security Trades Flat
Option | Value |
|---|---|
Broker | Eagle Investment Systems |
Trade Date | 01/04/02 |
Settlement Date | 01/04//02 |
Price Multiplier | .01 |
Quantity Scale | 1.00 |
Quantity | 1,000,000 |
Price | 0.09575000 |
Spot Exchange Rate | 1.455700000000 (GBP to USD) 01/04/02 |
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Credit |
G/L Account Name
Amount & Currency
Cost of Investments ( |
957.50 USD
Credit
Payable for Investments Purchased (Local)
957.50 USD
Debit
Debit/Credit
G/L Account Name
G/L Account Number
Debit
Cap/Floor Amortization Expense
1002000100
Credit
Cost of Investments
Base) |
657.76 GBP
Credit
Payable for Investments Purchased (Base)
657.76 GBP
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1010000100 |
Debit
Receivable For Cap/Floor Interest
1007000590
Credit
Cap/Floor Interest Income
4001000190
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Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Cap/Floor Amortization Expense (Local) | 1002000100 |
Credit | Cost of Investments (Local) | 1010000100 |
Debit | Receivable For Cap/Floor Interest (Local) | 1007000590 |
Credit | Cap/Floor Interest Income (Local) | 4001000190 |
Debit | Cap/Floor Amortization Expense (Base) | 1002000100 |
Credit | Cost of Investments (Base) | 1010000100 |
Debit | Receivable For Cap/Floor Interest (Base) | 1007000590 |
Credit | Cap/Floor Interest Income (Base) | 4001000190 |
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Open Transaction Information:
- Write or Sell to Open
- Trade Date 01/04/02
- Entity is GBP based
- Security is USD based
Security Trades Flat
Option | Value |
|---|---|
Broker | Eagle Investment Systems |
Trade Date | 01/04/02 |
Settlement Date | 01/04//02 |
Price Multiplier | .01 |
Quantity Scale | 1.00 |
Quantity | 1,000,000 |
Price | 0.09575000 |
Spot Exchange Rate | 1.455700000000 (GBP to USD) 01/04/02 |
Local Premium Value = (1,000,000 * 1.00) * (0.09575000 * .01) = 957.5 USD
Base Premium Value = 957.50 / 1.44557 = 657.76 GBP
General Ledger Entries executed by Eagle Accounting on 01/04/02:
Debit/Credit | G/L Account Name | Amount & Currency |
|---|---|---|
Debit | Cost of Investments (Local) | 957.50 USD |
Credit | Payable for Investments Purchased (Local) | 957.50 USD |
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|
|
Debit | Cost of Investments (Base) | 657.76 GBP |
Credit | Payable for Investments Purchased (Base) | 657.76 GBP |
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You can cancel Open Cap/Floor contracts prior to and after settlement. When you cancel an Open, the interest accrual and amortization values for the tax lot you are cancelling are automatically rolled back as part of the cancel transaction.
You can cancel cap/floor transactions using either the Cancel Trade panel or the Cancel and Rebook Trade tool.
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When an open contract is cancelled, the following general ledger postings are required:
For a Buy to Open
Local Currency = Settle Currency = Base Currency:
Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Investment Payable | 2002000100 |
Credit | Cost of Investments | 1010000100 |
Credit | Investment Interest Receivable | 1007000500 |
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Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Investment Payable (Local) | 2002000100 |
Credit | Cost of Investments (Local) | 1010000100 |
Credit | Investment Interest Receivable (Local) | 1007000500 |
Debit | Investment Payable (Base) | 2002000100 |
Credit | Cost of Investments (Base) | 1010000100 |
Credit | Investment Interest Receivable (Base) | 1007000500 |
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Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Cost of Investments | 1010000100 |
Debit | Investment Interest Payable | 2004000400 |
Credit | Receivable for Investments Sold | 1002000100 |
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Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Cost of Investments (Local) | 1010000100 |
Debit | Investment Interest Payable (Local) | 2004000400 |
Credit | Receivable for Investments Sold (Local) | 1002000100 |
Debit | Cost of Investments (Base) | 1010000100 |
Debit | Investment Interest Payable (Base) | 2004000400 |
Credit | Receivable for Investments Sold (Base) | 1002000100 |
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Cap and floor transactions settle according to the entity-level field elections selected for a fund:
- Auto Settle Indicator
- Contractual Cash Settlement Type
- Contract Settle Indicator
The premium of the contract is eligible to be moved through cash on the settlement date of the opening transaction, and any date after.
For a Buy Cap/Floor Contract
Local Currency = Settle Currency = Base Currency:
Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Investment Payable (Local) | 2002000100 |
Credit | Cash (Local) | 1001000100 |
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Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Investment Payable (Local) | 2002000100 |
Debit | Investment Payable (Base) | 2002000100 |
Credit | Cash (Local) | 1001000100 |
Credit | Cash (Base) | 1001000100 |
Dr / Cr | Trade Date To Settlement Date Gain/Loss | 3006000702 |
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Debit/Credit | G/L Account Name | G/L Account Number |
|---|---|---|
Debit | Cash | 1001000100 |
Credit | Investment Receivable | 1002000100 |
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Debit/Credit
G/L Account Name
G/L Account Number
Debit
Payable for Investments Purchased (Local)
2002000100
Debit
Payable for Investments Purchased (Base)
2002000100
Credit
Cash (Local)
1001000100
Credit
Cash (Base)
1001000100
Dr / Cr
Realized Currency Gain/Loss