Page 24 - P6 Slide Taxation - Lecture Day 5 - Foreign Exchange

22.5. FOREIGN EXCHANGE OPTION CONTRACT [FCOC]

• See definition in s 24I(1)

• Purpose?

→ To hedge against the risk of exchange rate fluctuations.

• Is the holder of the FCOC obliged to exercise it or not?

→ Yes, only the right (option), not the obligation.

• Two types of options?

→ American option – Exercisable on 'any' date in contract period.

→ European option – Exercisable only on specific date as in contract.

• Is it possible to pay a premium on a FCOC?

• How will this premium be treated for income tax purposes?

• Ruling exchange rates?

→ TD = Zero rate

→ TLD = Intrinsic value (= MV) ÷ foreign exchange amount in FCOC

→ RD = Intrinsic value (= MV) ÷ foreign exchange amount in FCOC