Related provisions for BIPRU 7.9.30
Table: proportional implied volatility shifts
This table belongs to BIPRU 7.9.30G
Remaining life of option |
Proportional shift |
|
Interest rates and CIUs |
||
≤ 1 month |
30% |
30% |
> 1 ≤ 3 months |
20% |
20% |
> 3 ≤ 6 months |
15% |
15% |
> 6 ≤ 9 months |
12% |
12% |
> 9 ≤ 12 months |
9% |
9% |
> 1 ≤ 2 years |
6% |
9% |
> 2 ≤ 4 years |
4.5% |
9% |
> 4 years |
3% |
9% |
Table: Option PRR: methods for different types of option
This table belongs to BIPRU 7.6.16R
Option |
Description |
Method |
American option |
An option that may be exercised at any time over an extended period up to its expiry date. |
Option standard method or option hedging method if appropriate |
European option |
An option that can only be exercised at expiry. |
|
Bermudan option |
A cross between an American option and European option. The Bermudan option can only be exercised at specific dates during its life. |
|
Asian option |
The buyer has the right to exercise at the average rate or price of the underlying over the period (or part of the period) of the option. One variant is where the payout is based on the average of the underlying against a fixed strike price; another variant is where the payout gives at expiry the price of the underlying against the average price over the option period. |
Option standard method or option hedging method if appropriate |
Barrier option |
An option which is either cancelled or activated if the price of the underlying reaches a pre-set level regardless of the price at which the underlying may be trading at the expiry of the option. The knock-out type is cancelled if the underlying price or rate trades through the trigger; while the knock-in becomes activated if the price moves through the trigger. |
|
Corridor option |
Provides the holder with a pay-out for each day that the underlying stays within a defined range chosen by the investor. |
|
Ladder option |
Provides the holder with guaranteed pay-outs if the underlying trades through a pre-agreed price(s) or rate(s) at a certain point(s) in time, regardless of future performance. |
|
Lock-in option |
An option where the pay-out to the holder is locked in at the maximum (or minimum) value of the underlying that occurred during the life of the option. |
|
Look-back option |
A European style option where the strike price is fixed in retrospect, that is at the most favourable price (i.e. the lowest (highest) price of the underlying in the case of a call (put)) during the life of the option. |
|
Forward starting option |
An option that starts at a future date. |
|
Compound option |
An option where the underlying is itself an option (i.e. an option on an option). |
Option standard method or option hedging method if appropriate |
Interest rate cap |
An interest rate option or series of options under which a counterparty contracts to pay any interest costs arising as a result of an increase in rates above an agreed rate: the effect being to provide protection to the holder against a rise above that agreed interest rate. |
Option standard method, but no reduction for the amount the option is out of the money is permitted |
Interest rate floor |
An interest rate option or series of options under which a counterparty contracts to pay any lost income arising as a result of a fall in rates below an agreed rate: the effect being to provide protection to the holder against a fall below that agreed interest rate. |
|
Performance option |
An option based on a reference basket comprising any number of assets, where the pay-out to the holder could be one of the following: the maximum of the worst performing asset, or 0; the maximum of the best performing asset, or 0; the maximum of the spreads between several pairs of the assets, or 0. |
Option standard method or option hedging method - using the highest PRA of the individual assets in the basket |
Quanto |
Quanto stands for "Quantity Adjusted Option". A quanto is an instrument where two currencies are involved. The payoff is dependent on a variable that is measured in one of the currencies and the payoff is made in the other currency. |
Subject to BIPRU 7.6.31R, the option standard method |
Cliquet option |
A cliquet option consists of a series of forward starting options where the strike price for the next exercise date is set equal to a positive constant times the underlying price as of the previous exercise date. It initially acts like a vanilla option with a fixed price but as time moves on, the strike is reset and the intrinsic value automatically locked in at pre-set dates. If the underlying price is below the previous level at the reset date no intrinsic value is locked in but the strike price will be reset to the current price attained by the underlying. If the underlying price exceeds the current level at the next reset the intrinsic value will again be locked in. |
Option standard method for a purchased cliquet, or the method specified in BIPRU 7.6.30R for a written cliquet |
Digital option |
A type of option where the pay-out to the holder is fixed. The most common types are all-or-nothing and one-touch options. All-or-nothing will pay out the fixed amount if the underlying is above (call) or below (put) a set value at expiry. The one-touch will pay the fixed amount if the underlying reaches a fixed point any time before expiry. |
The method specified in BIPRU 7.6.29 R |
The method specified for the type of instrument whose description it most closely resembles. |