Josskat plc pays a premium for an OTC call option over shares in
another quoted company. The holder of the option can, if they
exercise the option, choose either to take physical delivery of the
shares or to settle in cash. Josskat plc exercises the option and
chooses cash settlement. The cash sum it receives is based on the
difference between the market price of the share at the exercise
date, and the strike price specified in the contract.
Josskat plc exercises the option on a Friday. The terms of
the contract are that cash settlement is to be made on the business
day next following the exercise date, so the company receives the
cash on the following Monday. The contract also specifies that if
one or more non-business days precede the settlement date, the
settlement amount is increased to compensate the option holder for
the delay in getting their money. The increase is calculated with
respect to market rates of interest.
The provision at FA02/SCH26/PARA11(6) ensures that we do not
regard an interest rate as being an underlying subject matter of
the contract. The option has only one underlying subject matter,
the quoted shares.
