Document ID: chunk:federal_register_of_legislation:F2024L01519:body:0:p29
Version: federal_register_of_legislation:F2024L01519
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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] or a proprietary options pricing model approved, in writing, by APRA.

     2.          When calculating general market risk using the delta-plus method, an ADI must place delta-weighted positions with debt securities or interest rates as the underlying into the interest rate time bands by using a two-legged approach, where there is one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures.[39] An ADI using the delta-plus method must treat caps and floors as a series of European-style options.

     3.          For options with debt securities as the underlying, an ADI must apply a specific risk charge to the delta-weighted position on the basis of the issuer of the underlying security according to the approach in paragraphs 5 to 19 of this Attachment.

     4.          The capital charge for options with equities as the underlying must also be based on the delta-weighted positions that will be incorporated in the measure of market risk (both specific and general market risk) described in paragraphs 42 to 55 of this Attachment. An ADI must calculate the capital charge for options on foreign exchange and gold positions according to the method in paragraphs 56 to 64 of this Attachment. For delta risk, the net delta‑based equivalent of the foreign currency and gold options must be incorporated into the measurement of the exposure for the respective currency (or gold) position. The capital charge for options on commodities must be based on the incorporation of delta-weighted positions into either the maturity ladder (refer to paragraphs 72 to 75 of this Attachment) or the simplified approach (refer to paragraph 76 of this Attachment).

     5.          An ADI using the delta-plus method must calculate the gamma and vega capital charges for each option position separately.

     6.          The capital charges for 'gamma risk' must be calculated as:

Gamma impact = ½  gamma  (VU)2
    where VU denotes the variation in the price of the underlying of the option. VU must be calculated as follows:

        1.           for interest rate options, if the underlying is a bond, the market value of the underlying must be multiplied by the risk weights outlined in Table 6 of this Attachment. An equivalent calculation, based on the assumed changes 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