Treatment of Options

The options and related hedging positions will be evaluated over a specified range above and below the current value of the underlying. The range for interest rates is consistent with the assumed changes in yield in [14.26] . Those banks using the alternative method for interest rate options set out in [14.81] above should use, for each set of time bands, the highest of the assumed changes in yield applicable to the group to which the time bands belong. 92 The other ranges are ± 8% for equities, 93 ± 8% for FX and gold, and ± 15% for commodities. For all risk categories, at least seven observations (including the current observation) should be used to divide the range into equally spaced intervals. 14.83 The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of + 25% and - 25% is expected to be sufficient in most cases. As circumstances warrant, however, SAMA may choose to require that a different change in volatility be used and/or that intermediate points on the grid be calculated. 14.84 After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The capital requirement for each underlying will then be calculated as the largest loss contained in the matrix. 14.85 The application of the scenario analysis by any specific bank will be subject to SAMA consent, particularly as regards the precise way that the analysis is constructed. Banks’ use of scenario analysis as part of the simplified standardised approach will also be subject to validation by SAMA, and to those of the qualitative standards for internal models as set out in [10].