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  • Where the Underlying is a Debt Security or an Interest Rate

    • CA-13.3.4

      The delta-weighted option positions are slotted into the interest rate time-bands as set out in Chapter CA-9. A two-legged approach must be used as for other derivatives, as explained in Chapter CA-9, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. A few examples to elucidate the two-legged treatment are set out below:

      (a) A bought call option on a June three-month interest rate future will, in April, be considered, on the basis of its delta-equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months;
      (b) A written option with the same underlying as in (a) above, will be included in the measurement framework as a long position with a maturity of two months and a short position with a maturity of five months; and
      (c) A two months call option on a bond future where delivery of the bond takes place in September will be considered in April, as being long the bond and short a five months deposit, both positions being delta-weighted.
      January 2015

    • CA-13.3.5

      Floating rate instruments with caps or floors are treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six-month LIBOR with a cap of 10% must treat it as:

      (a) A debt security that reprices in six months; and
      (b) A series of five written call options on an FRA with a reference rate of 10%, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures.
      January 2015

    • CA-13.3.6

      The rules applying to closely matched positions, set out in Paragraph CA-9.8.2, also apply in this respect.

      January 2015