Treatment of Options

Besides the options risks mentioned above, SAMA is conscious of the other risks also associated with options, eg rho (rate of change of the value of the option with respect to the interest rate) and theta (rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, it expects banks undertaking significant options business at the very least to monitor such risks closely. Additionally, banks will be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so. 81 Unless all their written option positions are hedged by perfectly matched long positions in exactly the same options, in which case no capital requirement for market risk is required. 82 In some cases such as FX, it may be unclear which side is the underlying security; this should be taken to be the asset that would be received if the option were exercised. In addition, the nominal value should be used for items where the market value of the underlying instrument could be zero, eg caps and floors, swaptions etc. 83 Some options (eg where the underlying is an interest rate, a currency or a commodity) bear no specific risk but specific risk will be present in the case of options on certain interest rate related instruments (eg options on a corporate debt security or corporate bond index; see [14.3] to [14.40] for the relevant capital requirements) and for options on equities and stock indices (see [14.41] to [14.52] ). The charge under this measure for currency options will be 8% and for options on commodities 15%. 84 For options with a residual maturity of more than six months, the strike price should be compared with the forward, not current, price. A bank unable to do this must take the in the money amount to be zero. 85 Where the position does not fall within the trading book (ie options on certain FX or commodities positions not belonging to the trading book), it may be acceptable to use the book value instead. 86 SAMA may wish to require banks doing business in certain classes of exotic options (eg barriers, digitals) or in options at the money that are close to expiry to use either the scenario approach or the internal models alternative, both of which can accommodate more detailed revaluation approaches. 87 A two-month call option on a bond future where delivery of the bond takes place in September would be considered in April as being long the bond and short a five-month deposit, both positions being delta-weighted. 88 The rules applying to closely matched positions set out in [14.36] will also apply in this respect. 89 The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when calculating gamma capital requirements. Hoever, SAMA may wish to require specific banks to do so. 90 Positions have to be slotted into separate maturity ladders by currency. 91 Banks using the duration method should use the time bands as set out in [14.29] . 92 If, for example, the time bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined the highest assumed change in yield of these three bands would be 0.75. 93 The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when calculating gamma capital requirements. However, SAMA may wish to require specific banks to do so.