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  • CA-13.2 CA-13.2 Simplified Approach (Carve-out)

    • CA-13.2.1

      In the simplified approach, positions for the options and the associated underlying (hedges), cash or forward, are entirely omitted from the calculation of capital charges by the standardised methodology and are, instead, "carved out" and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The capital charges thus generated are then added to the capital charges for the relevant risk category, i.e., interest rate related instruments, equities, foreign exchange and commodities as described in chapters CA-9, CA-10, CA-11 and CA-12 respectively.

      Apr 08

    • CA-13.2.2

      The capital charges for the carved out positions are as set out in the table below. As an example of how the calculation would work, if a bank holds 100 shares currently valued at $ 10 each, and also holds an equivalent put option with a strike price of $ 11, the capital charge would be as follows:

      [$ 1,000 x 16%73] minus [($ 11 - $ 10)74 x 100] = $ 60

      A similar methodology applies to options whose underlying is a foreign currency, an interest rate related instrument or a commodity.

      Simplified Approach: Capital Charges

      Position Treatment
      Long cash and long put

      or

      Short cash and long call
      (i.e., hedged positions)             		The capital charge is:

      [Market value of underlying instrument75 x Sum of specific and general market risk charges76 for the underlying] minus [Amount, if any, the option is in the money77]

      The capital charge calculated as above is bounded at zero, i.e., it cannot be a negative number.
      Long call

      or

      Long put
      (i.e., naked option positions)       		The capital charge is the lesser of:
      i) Market value of the underlying instrument x Sum of specific and general market risk charges for the underlying; and
      ii) Market value of the option78.

      73 8% specific risk plus 8% general market risk.

      74 The amount the option is "in the money".

      75 In some cases such as foreign exchange, it may be unclear which side is the "underlying instrument"; this should be taken to be the asset which 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, e.g., caps and floors, swaptions etc.

      76 Some options (e.g., where the underlying is an interest rate, a currency or a commodity) bear no specific risk, but specific risk is present in the case of options on certain interest rate related instruments (e.g., options on a corporate debt security or a corporate bond index - see chapter CA-9 for the relevant capital charges), and in the case of options on equities and stock indices (see chapter CA-10 for the relevant capital charges). The capital charge for currency options is 8% and for options on commodities is 15%.

      77 For options with a residual maturity of more than six months, the strike price should be compared with the forward, not the current, price. A bank unable to do this should take the "in the money" amount to be zero.

      78 Where the position does not fall within the trading book options on certain foreign exchange and commodities positions not belonging to the trading book), it is acceptable to use the book value instead of the market value.

      Amended: April 2011