Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p28
Version: federal_register_of_legislation:F2024L01519
Segment Type: other
Provision Reference: 
Character Range: 78587–81481

months
Over 3 months and up to 6 months
Over 6 months and up to 12 months
Over 1 year and up to 2 years
Over 2 years and up to 3 years
Over 3 years

Treatment of options
     1.          An ADI must obtain prior approval from APRA to use an approach to the treatment of options. An ADI:

        1.           that uses solely purchased options[32] may use the simplified approach to the treatment of options; or

        2.           that also writes options must use either the delta-plus method, contingent loss method or the internal model approach (refer to Attachment C), depending on the significance of its trading.[33]

     1.          An ADI must, for the delta-plus method and the contingent loss approach, calculate the specific risk capital charges separately by multiplying the delta-equivalent amount of each option by the specific risk weights set out in paragraphs 3 to 55 of this Attachment.

Simplified approach

     1.          An ADI using the simplified approach may use the capital charges outlined in Table 10. In this approach, the positions for the options and the associated underlying assets, cash or forward, are not subject to the standard methodology but rather are 'carved-out' and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The risk numbers thus generated are then added to the capital charges for the relevant category, i.e. interest rate related instruments, equities, foreign exchange and commodities.

Table 10: Simplified approach: Capital charges

Position                  Treatment
Long cash and long put    The capital charge will be the market value of the underlying security[34] multiplied by the sum of specific and general market risk charges[35] for the underlying less the amount the option is in the money (if any) bounded at zero.[36]
or
Short cash and long call
Long call                 The capital charge will be the lesser of:
or                         1.           the market value of the underlying security multiplied by the sum of specific and general market risk charges for the underlying; and
Long put                   2.           the market value of the option.[37]

Delta‑plus method

     1.          An ADI that writes options may be allowed to include delta‑weighted options positions within the standard method. The ADI must report such options as a position equal to the sum of the market values of the underlying multiplied by the sum of the absolute values of the deltas. As delta does not cover all risks associated with options positions, the ADI must measure gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility) in order to calculate the total capital charge. These sensitivities must be calculated using an approved Exchange model[38]