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Entity B writes a 90-day American call option on shares of Target Ltd. at a strike of ₹100 per share. Strike > market price today. Under Ind AS 109, this option is:
AA financial asset to the option writer because writing options earns premium
BA derivative financial liability — value changes with the equity price, no initial net investment, future settlement; potentially unfavourable to the writer if market price rises above ₹100
COutside Ind AS 109 because it concerns shares of another entity, not the writer's own
DAn equity instrument because it relates to shares of Target Ltd.
Answer & Solution
Correct answer: B. A derivative financial liability — value changes with the equity price, no initial net investment, future settlement; potentially unfavourable to the writer if market price rises above ₹100
B Ltd. has written an option whose value depends on Target Ltd.'s share price (the underlying), no/little initial investment is required, and settlement is in future (within 90 days). The writer faces potentially unfavourable exchange if market rises above the strike. All three derivative criteria are met → derivative financial liability, measured at FVTPL.
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