RIT Co. has an investment of 5,000 shares in a public company, SIT Ltd. In October 2017, RIT Co. purchased
RIT Co. has an investment of 5,000 shares in a public company, SIT Ltd. In October 2017, RIT Co. purchased 5,000 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.
(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 declines. How would this be accounted for?
(c) Is this accounting treatment transparent?
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