Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p56
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 153673–156403

instruments.
    [31] For markets that have daily delivery dates, any contracts maturing within ten days of one another may be offset.
    [32] Where all the written option positions are hedged by perfectly matched long positions in exactly the same options, no capital charge for market risk is required.
    [33] An ADI doing business in certain classes of exotic options (e.g. barriers, digitals) may be required to use the contingent loss approach (described in paragraphs 89 to 95 of this Attachment) or the internal models alternative (Attachment C), which can accommodate more detailed revaluation approaches.
    [34]  In some cases, such as foreign exchange, it may be unclear which side is the 'underlying security'; this should be taken to be the asset which would be received if the option were exercised. In addition, the nominal value should be used for items where the market value of the underlying instrument could be zero, e.g. caps and floors, swaptions, etc.
    [35]  Some options (eg where the underlying is an interest rate, a currency or a commodity) bear no specific risk but specific risk will be present in the case of options on certain interest rate related instruments and for options on equities and stock indices. The charge under this measure for currency options will be eight per cent and, for options on commodities, 15 per cent.
    [36] For options with a residual maturity of more than six months, the strike price should be compared with the forward, not current, price. An ADI unable to do this must take the in-the-money amount to be zero. For options with a residual maturity of less than six months, an ADI, if able, is to use the forward price rather than the spot price.
    [37]  Where the position does not fall within the trading book (i.e. options on certain foreign exchange or commodities positions), it may be acceptable to use the book value instead.
    [38] For example, the pricing models used by the Australian Securities Exchange.
    [39] In the case of options on futures or forwards the relevant underlying is that on which the future or forward is based (e.g. for a bought call option on a June three-month bill future the relevant underlying is the three-month bill).
    [40] Positions must be slotted into separate maturity ladders by currency.
    [41] If, for example, the time-bands three to four years, four to five years and five to seven years are combined, the highest assumed change in yield of these three bands would be 0.75.
    [42]  The convenience yield reflects the benefits from direct ownership of the physical commodity (e.g. the ability to profit from temporary market shortages), and is affected both by market conditions and by factors such as