+Article 279a 1.

Article 279a 1.

Institutions shall calculate the supervisory delta as follows:

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(a) 

for call and put options that entitle the option buyer to purchase or sell an underlying instrument at a positive price on a single or multiple dates in the future, except where those options are mapped to the interest rate risk or commodity risk category, institutions shall use the following formula:

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image

where:

δ

=

the supervisory delta;

sign

=

– 1 where the transaction is a sold call option or a bought put option;

sign

=

+ 1 where the transaction is a bought call option or sold put option;

type

=

– 1 where the transaction is a put option;

type

=

+ 1 where the transaction is a call option;

N(x)

=

the cumulative distribution function for a standard normal random variable meaning the probability that a normal random variable with mean zero and variance of one is less than or equal to x;

P

=

the spot or forward price of the underlying instrument of the option; for options the cash flows of which depend on an average value of the price of the underlying instrument, P shall be equal to the average value at the calculation date;

K

=

the strike price of the option;

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T

=

the period between the expiry date of the option (Texp) and the reporting date; for options which can be exercised at one future date only, Texp is equal to that date; for options which can be exercised at multiple future dates, Texp is equal to the latest of those dates; T shall be expressed in years using the relevant business day convention; and

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σ

=

the supervisory volatility of the option determined in accordance with Table 1 on the basis of the risk category of the transaction and the nature of the underlying instrument of the option.



Table 1

Risk category

Underlying instrument

Supervisory volatility

Foreign exchange

All

15 %

Credit

Single-name instrument

100 %

Multiple-names instrument

80 %

Equity

Single-name instrument

120 %

Multiple-names instrument

75 %

Commodity

Electricity

150 %

Other commodities (excluding electricity)

70 %

Others

All

150 %

Institutions using the forward price of the underlying instrument of an option shall ensure that:

(i) 

the forward price is consistent with the characteristics of the option;

(ii) 

the forward price is calculated using a relevant interest rate prevailing at the reporting date;

(iii) 

the forward price integrates the expected cash flows of the underlying instrument before the expiry of the option;

(b) 

for tranches of a synthetic securitisation and a nth-to-default credit derivative, institutions shall use the following formula:

image

where:



sign =
left accolade

+ 1 where credit protection has been obtained through the transaction

– 1 where credit protection has been provided through the transaction

A

=

the attachment point of the tranche; for a nth-to-default credit derivative transaction based on reference entities k, A = (n – 1)/k; and

D

=

the detachment point of the tranche; for a nth-to-default credit derivative transaction based on reference entities k, D = n/k;
(c) 

for transactions not referred to in point (a) or (b), institutions shall use the following supervisory delta:



δ =
left accolade

+ 1 if the transaction is a long position in the primary risk driver or in the most material risk driver in the given risk category

– 1 if the transaction is a short position in the primary risk driver or in the most material risk driver in the given risk category

1. Overview

,

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

Requirements

3. Related Standards

Standards