Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p30
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 83820–86619

in yield in Table 6, must be carried out where the underlying is an interest rate;

        2.           for options on equities and equity indices, the market value of the underlying must be multiplied by eight per cent;

        3.           for options on foreign exchange and gold, the market value of the underlying must be multiplied by eight per cent; and

        4.           for options on commodities, the market value of the underlying must be multiplied by 15 per cent.

     1.          When calculating the gamma impact, an ADI must treat as the same underlying:

        1.           for interest rates,[40] each time band outlined in Table 6 for an ADI using the maturity method. An ADI using the duration method must use the time bands as set out in the second column of Table 6;

        2.           for equities and stock indices, each national market;

        3.           for foreign currencies and gold, each currency pair and gold; and

        4.           for commodities, each individual commodity as defined in paragraph 68 of this Attachment.

     1.          Each option on the same underlying will have a gamma impact that is either positive or negative. An ADI must sum these individual gamma impacts, resulting in a net gamma impact for each underlying that is either positive or negative. Only those gamma impacts that are negative are included in the capital calculation. The total gamma capital charge is the sum of the absolute value of the net gamma impacts.

     2.          To calculate vega risk, an ADI must multiply the vega for each option by a 25 per cent proportional shift in the option's current volatility. The results must then be summed across each underlying. The total capital charge for vega risk is calculated as the sum of the absolute value of vega across each underlying.

Contingent loss approach

     1.          An ADI may also base the market risk capital charge for options portfolios and associated hedging positions on contingent loss matrix analysis. This requires the ADI to specify a fixed range of changes in the option portfolio's risk factors (i.e. underlying price and volatility) and calculate changes in the value of the option portfolio at various points along this matrix. For the purpose of calculating the capital charge, the ADI must revalue the option portfolio using matrices for simultaneous changes in the option's underlying rate or price and in the volatility of that rate or price. A different matrix must be set up for each individual underlying as defined in paragraph 86 of this Attachment. As an alternative, an ADI that is a significant trader in options may, for interest rate options, base the calculation on a minimum of six sets of time bands if not more than three of the time bands (as