Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p31
Version: federal_register_of_legislation:F2024L01519
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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 defined in column 1 of Table 6) are combined into any one set.

     2.          An ADI must evaluate the options and related hedging positions over a specified range above and below the current value of the underlying to define the first dimension of the matrix. The range for interest rates is consistent with the assumed changes in yield in Table 6. An ADI using the contingent loss approach for interest rate options must use, for each set of time bands, the highest of the assumed changes in yield applicable to the group to which the time bands belong.[41] The other ranges are ± eight per cent for equities, ± eight per cent for foreign exchange and gold, and ±15 per cent for commodities. For all risk categories, at least seven price shifts (including the current observation) must be used to divide the range into equally spaced intervals.

     3.          The second dimension of the matrix entails a change in the volatility of the underlying rate or price. While a single change in the volatility of the underlying rate or price equal to a proportional shift in volatility of ±25 per cent may be sufficient in most cases, APRA may require that a different change in volatility be used and/or that intermediate points on the matrix be calculated.

     4.          After calculating the matrix, each cell will contain the net profit or loss of the option and the underlying hedge instrument. The capital charge for each underlying must then be calculated as the largest loss contained in the matrix.

     5.          An ADI using the contingent loss approach must calculate the specific risk charge using the same approach as for the delta-plus method (refer to paragraphs 82 and 83 of this Attachment).

     6.          An ADI using the contingent loss approach must comply with the qualitative standards set out in Attachment C that are appropriate to the nature of the ADI's business.

     7.          An ADI undertaking significant options business must, at a minimum, closely monitor any other risks associated with options, e.g. rho (rate of change of the value of the option with respect to the interest rate). The ADI may incorporate rho into its capital calculations for interest rate risk.

Attachment C

The internal model approach

Key requirements
 1.              The internal model approach is based on the use of value-at-risk (VaR) techniques. However, an ADI may seek APRA's written approval to use a capital calculation methodology other than VaR.
 2.              In addition, an ADI