Minimum Capital Requirements for Market Risk

Delta-weighted positions with debt securities or interest rates as the underlying will be slotted into the interest rate time bands, as set out in [14.3] to [14.40] , under the following procedure. A two-legged approach should be used as for other derivatives, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. For instance, a bought call option on a June three-month interest-rate future will in April be considered, on the basis of its delta-equivalent value, to be a long position with a five-month maturity and a short position with a two-month maturity. 87 The written option will be similarly slotted as a long position with a two-month maturity and a short position with a five-month maturity. Floating rate instruments with caps or floors will be treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six month LIBOR with a cap of 15% will treat it as: (1) a debt security that reprices in six months; and (2) a series of five written call options on an FRA with a reference rate of 15%, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures. 88 14.79 The capital requirement for options with equities as the underlying will also be based on the delta-weighted positions that will be incorporated in the measure of equity risk described in [14.41] to [14.52]. For purposes of this calculation each national market is to be treated as a separate underlying. The capital requirement for options on FX and gold positions will be based on the method for FX rate risk as set out in [14.53] to [14.62] . For delta risk, the net delta-based equivalent of the foreign currency and gold options will be incorporated into the measurement of the exposure for the respective currency (or gold) position. The capital requirement for options on commodities will be based on the simplified or the maturity ladder approach for commodities risk as set out in [14.63] to [14.73] . The delta-weighted positions will be incorporated in one of the measures described in that section.