CA-8.1 CA-8.1 Introduction
CA-8.1.1
It is recognised that the measurement of the
price risk of options is inherently a difficult task, which is further complicated by the wide diversity of banks' activities in options. The Central Bank has decided that the following approaches should be adopted to the measurement of options risks:(a) Banks which solely use purchased options are permitted to use the simplified (carve-out) approach described later in this Chapter.(b) Banks which also write options should use either the delta-plus (buffer) approach or the scenario approach, or alternatively use a comprehensive risk management model. The Central Bank's detailed rules for the recognition and use of internal models are included in Chapter CA-9.October 07CA-8.1.2
The scenario approach and the internal models approach are generally regarded as more satisfactory for managing and measuring options risk, as they assess risk over a range of outcomes rather than focusing on the point estimate of the 'Greek' risk parameters as in the delta-plus approach. The more significant the level and/or complexity of the bank's options trading activities, the more the bank will be expected to use a sophisticated approach to the measurement of options risks. The Central Bank will monitor the banks' options trading activities, and the adequacy of the risk measurement framework adopted.
October 07CA-8.1.3
Where written
option positions arehedged by perfectly matched long positions in exactly the sameoptions , no capital charge for market risk is required in respect of those matched positions.October 07
