CHAPTER 6
Accounting for Equity Index Futures
LEARNING OBJECTIVES
After studying this chapter, you should have a grasp of the following:
- Trade life cycle of exchange-traded equity index futures.
- Journal entries to be recorded during the different phases of the trade life cycle.
- FX revaluation and FX translation process for these trades.
- Illustration of trades in long index futures with FX translation.
- Preparation of general ledger accounts.
- Preparation of income statement and balance sheet after the equity futures trades are done.
- Illustration of trades in short index futures with FX translation.
THE TRADE LIFE CYCLE FOR EQUITY INDEX FUTURES
- Pay the initial margin on index futures to the exchange.
- Buy the index futures.
- Pay the brokerage/commission on the buy transaction.
- Pay the margin amount for the index futures.
- Ascertain the fair value at the end of the reporting period.
- Pay margin call.
- Sell the index futures and pay brokerage.
- Ascertain the profit/loss on the sale.
- Reversal of margin money.
- Expiry of index futures.
- Receive the consideration.
- FX revaluation entries.
- FX translation entries.
Pay the Initial Margin on Index Futures to the Exchange
Margin is payable to the exchange if the investor either buys or sells a futures contract. For futures, since the stock exchange has the responsibility of ensuring that both the legs of the transaction are complete, the exchange would insist on a deposit of a percentage of the value of the contract as margin money. The margin ...
