Related provisions for BIPRU 7.3.6
Table: Appropriate PRR calculation for an option or warrant
This table belongs to BIPRU 7.6.3R
Option type (see BIPRU 7.6.18R) or warrant |
PRR calculation |
American option, European option, Bermudan option, Asian option or warrant for which the in the money percentage (see BIPRU 7.6.6R) is equal to or greater than the appropriate position risk adjustment (see BIPRU 7.6.7R and BIPRU 7.6.8R) |
Calculate either an option PRR, or the most appropriate to the underlying position of:
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American option, European option, Bermudan option, Asian option or warrant:
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Calculate an option PRR |
All other types of option listed in BIPRU 7.6.18R (regardless of whether in the money, at the money or out of the money). |
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) |
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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 |
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In the money by more than the position risk adjustment |
In the money by less than the position risk adjustment |
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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: |
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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 |
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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. |
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Z means |
The option hedging method is not permitted; the option standard method must be used. |
Table: Instruments which result in notional positions
This table belongs to BIPRU 7.3.2R(2)
Instrument |
See |
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Depository receipts |
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Convertibles where: |
(a) the convertible is trading at a market price of less than 110% of the underlying equity; and the first date at which conversion can take place is less than three months ahead, or the next such date (where the first has passed) is less than a year ahead; or |
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(b) the conditions in (a) are not met but the firm includes the convertible in its equity PRR calculation rather than including it in its interest rate PRR calculation set out in BIPRU 7.2 (Interest rate PRR). |
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Futures, forwards, CFDs and synthetic futures on a single equity |
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Futures, forwards, CFDs and synthetic futures on a basket of equities or equity index |
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Options or warrants on a single equity, an equityfuture, a basket of equities or an equity index (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6). |
Table: Instruments which result in notional positions
This table belongs to BIPRU 7.2.3R(2)
Instrument |
See |
Futures, forwards or synthetic futures on debt securities |
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Futures, forwards or synthetic futures on debt indices or baskets |
|
Interest rate futures or forward rate agreements (FRAs) |
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Interest rate swaps or foreign currencyswaps |
|
Deferred start interest rate swaps or foreign currencyswaps |
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The interest rate leg of an equityswap (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives)) |
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The cash leg of a repurchase agreement or a reverse repurchase agreement |
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Cash borrowings or deposits |
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Options on a debt security, a basket of debt securities, a debt security index, an interest rate or an interest rate future or swap (including an option on a future on a debt security) (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR)) |
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Dual currency bonds |
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Forwards, futures or options (except cliquets) on an equity, basket of equities or equity index (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3) |
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Credit derivatives |
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Table: Types of CAD 1 model
This table belongs to BIPRU 7.9.6G
Options risk aggregation models |
Interest rate pre-processing models |
|
Brief description and eligible instruments |
Analyse and aggregate options risks for:
|
May be used to calculate duration weighted positions for:
|
The output and how it is used in the PRR calculation |
Depending on the type of model and the requirements in the CAD 1 model waiver granted, the outputs from an options risk aggregation model are used as an input to the market risk capital requirement calculation. |
Depending on the type of model and the requirements in the CAD 1 model waiver granted, the individual sensitivity figures produced by this type of CAD 1 model are either input into the calculation of interest rate PRR under the interest rate duration method (see BIPRU 7.2.63R) or are converted into notional position and input into the calculation of interest rate PRR under the interest rate maturity method (see BIPRU 7.2.59R). |