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K.R. Srivats

NEW DELHI, June 4

THE Institute of Chartered Accountants of India (ICAI) has spelt out the accounting treatment of equity index options and equity stock options from the viewpoint of parties who enter into such option contracts as buyers or sellers.

In a Guidance Note, the Institute has made it clear that the accounting treatment recommended is applicable to all equity index options and equity stock option contracts entered into, irrespective of the motive for which they are bought or sold.

Equity index options and equity stock options are financial instruments, which are bought or sold with specific motives - speculation, hedging or arbitrage.

Sources said that the Guidance Note would in a way take care of the concerns expressed by the Securities and Exchange Board of India over the need to put together specific accounting treatments for new derivative instruments that are being used in the capital markets of the country.

The ICAI Guidance Note has spelt out the accounting treatment on equity index options and equity stock options in case of cash settled options. It also specifies the accounting treatment for equity stock options that are settled by delivery.

At present in India, both equity index options and equity stock options are settled through cash. However, in the near future equity stock options may be settled through physical delivery of shares.

Trading in equity index options are currently allowed in two indexes-BSE Sensex and S&P CNX Nifty. Equity stock options are allowed on 31 securities listed on the stock exchanges. Equity index options differ from equity stock options in terms of the underlying assets, the time of settlement and mode of settlement.

In the case of equity index options, the underlying asset is equity index itself (eg BSE Sensex, S&P CNX Nifty). In the case of equity stock options, the underlying asset is equity shares of the company. As regards the time of settlement, equity index options are of European style i.e. buyer/holder can exercise his option only on the day on which the option expires. Equity stock options are of American style i.e. the buyer/holder can exercise his option at any time before the expiry date or on the date of expiry itself.

The settlement of an equity index option contract takes the form of payment of the difference between the strike/exercise price and the value of the index on the maturity date, in cash.

In contrast, equity stock options can be settled through delivery of shares for which an option contract was entered into or by payment of difference between strike/exercise price and the value of the share for which the option contract was entered into, in cash, just like an equity index option.

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ICAI lays down accounting norms for equity index, stock options

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