QuoteOriginally posted by: jd1123Um...1) I'm telling you how it's done by traders marking their books. If you delta hedge your option or do something else, then you record that expense separately. If you sell an option, you record the premium - value (from whatever model you choose or the market). I don't care about future hedging costs. What happens if I don't hedge the option?2) You would use mark to model if and only if the option is illiquid. Otherwise, you mark to market. If the market is liquid and your model says something different, your model is wrong. If you can't liquidate the option at the model price, well, this shit happens a lot. Don't know what to tell you.3) If you want to waste your time with accounting, become an accountant. If you want to be a quant or trader, focus on topic that would help you perform in that function. Accounting, beyond a very basic idea of it, will not help you trade. If you're using accounting to help you trade, you're probably doing something illegal. 4) That's what happens. Suppose you have an ATM option expiring tomorrow on nat gas, and the market jumps $.50. You record a large gain on the expiry of the option that was nearly worthless yesterday. Don't know what to tell you, shit happens.Ok... 1) What do you think about jawabean's comment on amortizing the premium?2) How do you draw the line between a liquid market and an illiquid market? 3) Actually, I'm a quant in risk management and we have to deal with accounting issues

QuoteOriginally posted by: Some guy"The accounting people use to make trade decisions is very basic. I have no accounting experience but I can definitely build a cashflow model to make equity trading decisions on."Heh heh, building a spreadsheet is so easy that every monkey thinks they can build one -- just like every teenager thinks she can be a rock'n roll star. Every monkey can try to sing, but how many monkeys can do it well enough to make a profit consistently?

1) The premium should be amortised according to the option-type. Theres should be explicit guidelines for that. For instance, suppose you have an interest rate swap. Then the Upfront should probably be amortised (if you hedge say a fixed-interest bond with this swap, then you would amortise the premium/discount on the bond -- so the two amortisations have to match)2) You do not need a draw a line between liquid and illiquid markets. Is there a sort of market price for your option or for a similar option, then you should take this price for the accounting. is there no market price, then you do mark-to-model pricing.

QuoteOriginally posted by: krk1) The premium should be amortised according to the option-type. Theres should be explicit guidelines for that. For instance, suppose you have an interest rate swap. Then the Upfront should probably be amortised (if you hedge say a fixed-interest bond with this swap, then you would amortise the premium/discount on the bond -- so the two amortisations have to match)there are explicit guidelines, as i noted before it's fas133 and related docs in usa. discount/premium of swap is amortized. also, if swap (or its portion) is used for hedging, then you have to compute the change in fair market values of the swap and the asset/liability being hedged for each period. you have to reflect in the books how well your hedge works.

QuoteOriginally posted by: Traden4Alpha2) Fundamental Analysis: Traditional accounting is woefully inadequate for explaining the growth and earnings potential. The rules of accounting force companies to expense some things that they shouldn't (such as training and marketing) while letting companies retain bogus estimates of the values of some assets or liabilities (e.g., intangible assets). And I won't get into the debate about whether employee options should be expensed or not. The gap between accounting and reality shows up in the variations in total factor productivity analyses and in the simple discrepancy between market cap and book value. Clever traders of a certain breed look for these situations when the official accounting misses the real story.I was really stunned when I learned that companies should expense R&D development and patents design. It regresses any economic advancement.