CA-13.1 CA-13.1 Introduction
CA-13.1.1
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 ofconventional bank licensees' activities in options. The CBB has decided that the following approaches must be adopted to the measurement of options risks:(a)Conventional bank licensees which solely use purchased options are permitted to use the simplified (carve-out) approach described later in this Chapter; and(b)Conventional bank licensees which also write options must use either the delta-plus (buffer) approach or the scenario approach, or alternatively use a comprehensive risk management model. The CBB's detailed rules for the recognition and use of internal models are included in Chapter CA-14.January 2015CA-13.1.2
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
conventional bank licensee's options trading activities, the more theconventional bank licensee will be expected to use a sophisticated approach to the measurement of options risks. The CBB will monitor theconventional bank licensees ' options trading activities, and the adequacy of the risk measurement framework adopted.January 2015CA-13.1.3
Where written
option positions arehedged by perfectly matched long positions in exactly the sameoptions , no capital charge formarket risk is required in respect of those matched positions.January 2015
