Related provisions for BIPRU 7.11.2
Table: Interest rate risk on other futures, forwards, options and swaps
This table belongs to BIPRU 7.2.34R.
Instrument |
Notional positions |
||
a long position denominated in the currency purchased |
and |
a short position denominated in the currency sold |
|
a long position if the forward or future involves an actual (or notional) sale of gold |
or |
a short position if the forward or future involves an actual (or notional) purchase of gold |
|
Equityforward or future, or option (unless the interest rate PRR is calculated under the basic interest rate PRR calculation in BIPRU 7.3) |
A long position if the contract involves an actual (or notional) sale of the underlying equity |
or |
A short position if the contract involves an actual (or notional) purchase of the underlying equity |
Table: simplified equity method position risk adjustments
This table belongs to BIPRU 7.3.29R
Instrument |
|
Single equities |
16%2 2 |
Qualifying equity indices2 (see BIPRU 7.3.38R) 2 |
8% |
All other equity indices or baskets |
16%2 2 |
If it is necessary to distinguish between the specific risk position risk adjustment and the general market risk position risk adjustment, the specific risk position risk adjustment for the first and third rows is 8%2 and that for the second row is 0%. The rest of the position risk adjustment in the second column is the general market risk position risk adjustment 2 |
Table: Instruments which result in notional positions
This table belongs to BIPRU 7.4.2R(3)
Instrument |
See |
Forwards, futures, CFDs, synthetic futures and options on a single commodity (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR)) |
|
A commitment to buy or sell a single commodity at an average of spot prices prevailing over some future period |
|
Forwards, futures, CFDs, synthetic futures and options on a commodity index (unless the firm calculates an PRR on the option under BIPRU 7.6) |
|
A warrant relating to a commodity must be treated as an option on a commodity. |
Table: Maturity bands for the maturity ladder approach
This table belongs to BIPRU 7.4.26R
Band |
Maturity of position |
Band 1 |
0 ≤ 1 month |
Band 2 |
> 1 month ≤ 3 months |
Band 3 |
> 3 months ≤ 6 months |
Band 4 |
> 6 months ≤ 1 year |
Band 5 |
> 1 year ≤ 2 years |
Band 6 |
> 2 years ≤ 3 years |
Band 7 |
> 3 years |
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 position risk adjustment 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. |
Table: Appropriate treatment for equities, debt securities or currencies hedging options
This table belongs to BIPRU 7.6.24R
Hedge |
PRR calculation for the hedge |
Limits (if hedging method is used) |
Naked position |
The equity must be treated in either BIPRU 7.3 (equity PRR) or the option hedging method (see the table in BIPRU 7.6.27R) |
The option hedging method must only be used up to the amount of the hedge that matches the notional amount underlying the option or warrant |
To the extent that the amount of the hedge (or option or warrant) exceeds the notional amount underlying the option or warrant (or hedge), a firm must apply an equity PRR, interest rate PRR or foreign currencyPRR (or the option standard method) |
|
The debt security must be treated in BIPRU 7.2 (interest rate PRR) or the option hedging method (see the table in BIPRU 7.6.27R) |
As for the first row |
As for the first row |
|
Gold (hedging a gold option) |
The gold must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.27R) |
As for the first row |
As for the first row |
A currency or currencies (hedging a currency option) |
The currency must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.28R) |
As for the first row |
As for the first row |
Table: The hedging method of calculating the PRR (equities, debt securities and gold)
This table belongs to BIPRU 7.6.24R(1) - (3)
PRR |
||||
In the money by more than the position risk adjustment |
In the money by less than the position risk adjustment |
|||
Long in security or gold |
Long put |
Zero |
Wp |
X |
Short call |
Y |
Y |
Z |
|
Short in security or gold |
Long call |
Zero |
Wc |
X |
Short put |
Y |
Y |
Z |
|
Where: |
||||
Wp means |
{(position risk adjustment-100%) x The underlying position valued at strike price} |
+ |
The market value of the underlying position |
|
Wc means |
{(100% +position risk adjustment x The underlying position valued at strike price} |
- |
The market value of the underlying position |
|
X means |
The market value of the underlying position multiplied by the appropriate position risk adjustment |
|||
Y means |
The market value of the underlying position multiplied by the appropriate position risk adjustment. This result may be reduced by the market value of the option or warrant, subject to a maximum reduction to zero. |
|||
Z means |
The option hedging method is not permitted; the option standard method must be used. |
Table: The hedging method of calculating the PRR (currencies)
This table belongs to BIPRU 7.6.24R(4)
In the money by more than 8% |
In the money by less than 8% |
||
Long calls & long puts |
Zero |
WL |
X |
Short calls & short puts |
Zero |
Y |
X |
Where: |
|||
WL means |
(1.08% x U) |
- |
The market value of the underlying position |
U means |
The amount of the underlying currency that the firm will receive if the option is exercised, converted at the strike price into the currency that the firm will sell if the option is exercised |
||
X means |
The market value of the underlying position multiplied by 8%. |
||
Y means |
The market value of the underlying position multiplied by 8%. This result may be reduced by the market value of the option, subject to a maximum reduction to zero. |
Table: instruments which result in notional foreign currency positions
This table belongs to BIPRU 7.5.3R(6).
Instruments |
See |
Foreign currencyfutures, forwards, synthetic futures and CFDs |
|
Foreign currency options or warrants (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6 (Option PRR)). |
|
Gold futures, forwards, synthetic futures and CFDs |
|
Gold options (unless the firm calculates a PRR on the option under BIPRU 7.6). |
|