Document ID: chunk:federal_register_of_legislation:F2023L01599:reg:6:p25
Version: federal_register_of_legislation:F2023L01599
Segment Type: reg
Provision Reference: reg 6 (pt 25/35)
Character Range: 90831–93530

function;
Ti = the time interval between the calculation date (today) and the latest contractual exercise date as referenced by transaction i, measured in years;
Pi = the underlying price[39] of option i;
Ki = the strike price of option i; and
σi = the supervisory volatility of the option i.
45.         For all interest rate options in currency j where the supervisory delta adjustment ẟi for at least one of those options cannot be calculated (i.e. where P≤0 and/or K≤0), ẟi must be calculated according to the formula in Table 5 and the requirements in paragraph 47 of this Attachment.[40] An ADI must seek approval from APRA for the specification and value of λj. APRA may require an ADI to use the alternative formula or that a particular value of λj to be applied.
Table 5: Alternative formula for supervisory delta adjustment
               Bought  Sold
Call options
Put options

where:
λi = the shift parameter applying to the set of all interest rate options in currency j where λj would represent the extent to which affected currency j can be negative. This would be set to allow computation of the supervisory delta adjustment with the objective that λj is to be set as low as possible.
46.         For tranches of CDOs and nth-to-default transactions in the credit asset class, the supervisory delta adjustment ẟi must be set according to Table 6:
Table 6: Supervisory delta adjustment for CDO tranches
Purchased (long protection)  Sold (short protection)

where:
Ai = the attachment point of the CDO tranche or (n – 1)/m for an nth-to-default transaction on a pool of m reference names for transaction i; and
Di = the detachment point of the CDO tranche or n/m for a nth-to-default transaction on a pool of m reference names for transaction i.
47.         For options, the calculation of transaction level effective notional amount differs depending on the nature of the option payoff and must be calculated as follows:
(a)          single payment European options must use the supervisory delta adjustment formulas in paragraph 44 and 45 of this Attachment;
(b)          single payment Asian options must use the formulas in paragraph 44 and 45 of this Attachment with Pi set equal to the current value of the average used in the payoff;
(c)          single payment American and Bermudan options must use the formulas in paragraph 44 and 45 of this Attachment with Ti set equal to the latest allowed exercise date;
(d)          single payment Bermudan swaptions must  set the start date Si equal to the earliest allowed exercise date, and the end date Ei equal to the end date of the underlying swap in the formulas in paragraph 25;
(e)          single payment digital or binary