RIT Co has an investment of 5,000 shares in a public company, SIT Ltd In October 2014, RIT Co purchased put options for SIT Ltd shares at a price of $2 per put option The strike price associated with the put options is $100 per share, which is equal to the current trading price of the shares Instru...

a The put option contract is entered into to protect from a potential loss on an investment By purch ...

RIT Co. has an investment of 5,000 shares in a public company, SIT Ltd. In October 2014,

Question:

RIT Co. has an investment of 5,000 shares in a public company, SIT Ltd. In October 2014, RIT Co. purchased put options for SIT Ltd. shares at a price of $2 per put option. The associated with the put options is $100 per share, which is equal to the current trading price of the shares.
Instructions
(a) What is the purpose of the put options purchased by RIT Co.?
(b) How would RIT account for the purchase of the put options? Assume that the value of the shares of SIT subsequently decline. How would this be accounted for?
(c) Is this accounting treatment transparent?
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.