Exhibit 4
FloorIT Bank Journal Entries and Summary of
Results
(Students are required to fill in the
numbers shown in red.)
Instructions: Please fill in debits without dollar signs and credits in parentheses. If there is no entry for a given account, please leave it blank rather than entering a zero. Note that all accounts listed for a given date will not necessarily have entries on that date.
Date |
FloorIT Bank Accounts |
Debit |
Balance |
1999 |
|||
June 17 |
Cash | (90,625) |
(90,625) |
| Options contracts | 90,625 |
90,625 |
|
| Interest expense (revenue) | |||
| Other comprehensive income (OCI) | |||
| --To record purchase of 50 call option contracts | |||
June 30 |
Cash | (90,625) |
|
| Options contracts | 8,125 |
98,750 |
|
| Interest expense (revenue) | 16,875 |
16,875 |
|
| Other comprehensive income (OCI) | (25,000) |
(25,000) |
|
| --To record value adjustment of option contracts | |||
July 31 |
Cash | (90,625) |
|
| Options contracts | (30,000) |
68,750 |
|
| Interest expense (revenue) | 12,500 |
29,375 |
|
| Other comprehensive income (OCI) | 17,500 |
(7,500) |
|
| --To record value adjustment of option contracts | |||
Aug. 31 |
Cash | (90,625) |
|
| Options contracts | (12,500) |
56,250 |
|
| Interest expense (revenue) | 55,000 |
84,375 |
|
| Other comprehensive income (OCI) | (42,500) |
(50,000) |
|
| --To record value adjustment of option contracts | |||
Sept. 17 |
Cash | 93,750 |
3,125 |
| Options contracts | (56,250) |
||
| Interest expense (revenue) | (84,375) |
|
|
| Other comprehensive income (OCI) | 46,875 |
(3,125) |
|
| --To record option contract settlement | |||
Sept. 17 |
Cash | (25,000,000) |
(24,996,875) |
| Options contracts | |||
| Notes receivable | 25,000,000 |
25,000,000 |
|
| Interest expense (revenue) |
|
||
| Other comprehensive income (OCI) |
(3,125) |
||
| --To record loan transaction for $25 million |
|
||
Dec. 17 |
Cash | 25,278,125 |
281,250 |
| Options contracts | |||
| Notes receivable | (25,000,000) |
||
| Interest expense (revenue) | (281,250) |
(281,250) |
|
| Other comprehensive income (OCI) |
3,125 |
||
| --To record payoff of $25 million loan | |||
FloorIT Bank Summary |
|
| Interest revenue without hedging | $ 278,125 |
| Net income from Eurodollar call option hedges | 3,125 |
| Interest revenue with hedging | $ 281,250 |
Comment: Whereas futures contract hedges lock in a fixed interest revenue, the call option contracts in this case only lock in an interest rate floor if interest rates plunge. If interest rates soar, the call options expire worthless, but the interest revenue on the $25 million note receivable may rise above the hedged floor of $281,250.