A bank sells a put and a call - where does it show up in the book? Asset or Liability

Question

I have some difficulties seeing where financial products show up in banks balancesheets?

For example if I buy a put and a call option OTC from a bank, will it be an Asset or a liability from the banks perspective?

Thanks guys, hope it is not a silly question.

Answer 1

For any dealer in OTC options, a short option position represents a liability, since, after receiving the initial payment, that contract offers only potential cash outflows.[1]

To use an IFRS definition, a liability is:

• a present obligation

• arising from a past event

• the settlement of which is expected to lead to an outflow of future economic benefits from the entity.

I'd expect these liabilities to be recognised at "fair value through profit and loss", i.e. variations in the option liability would generate profit or loss.

To emphasise the point: IAS32 defines a "financial instrument" as "a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity".

The hope of the dealer is that the option premium received is sufficient to cover the costs of hedging that position plus a profit margin.

[1] Ignoring any margining / collateral-type cash flows.

Edit: have a look at Deutsche Bank's 2015 balance sheet at https://annualreport.deutsche-bank.com/2015/ar/financial-statements/consolidated-balance-sheet.html

If DB had sold you an OTC option, I'd expect the option position to be reflected in the line "Financial liabilities at fair value through profit or loss", in the sub-item "Negative market values from derivative financial instruments".