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.
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
When a contract is opened, the following general ledger postings are required.
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 |
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 |