Article 4 Overview of determination of own funds requirements according to the Delta-plus approach

Where institutions opt to apply the Delta-plus approach, for options and warrants whose gamma is a continuous function in the price of the underlying and whose vega is a continuous function in the implied volatility ("continuous options and warrants"), the own funds requirements for non-delta risks on options or warrants shall be calculated as the sum of the following requirements:

1. (a)

   the own funds requirements relating to the partial derivative of delta with reference to the price of the underlying which, for bond options or warrants is the partial derivative of delta with reference to the yield-to-maturity of the underlying bond, and for swaptions is the partial derivative of the delta with reference to the swap rate;

2. (b)

   the requirement relating to the first partial derivative of the value of an option or warrant, with reference to the implied volatility.

Implied volatility shall be taken to be the value of the volatility in the option or warrant pricing formula for which, given a certain pricing model and given the level of all other observable pricing parameters, the theoretical price of the option or warrant is equal to its market value, where "market value" is understood in the manner described in Article 3(4).

The own funds requirements for non-delta risks related to non-continuous options or warrants shall be determined as follows:

1. (a)

   where the options or warrants have been bought, as the maximum amount between zero and the difference between the following values:

   1. (i)

      the market value of the option or warrant, understood in the manner described in Article 3(4);

   2. (ii)

      the risk weighted delta equivalent amount, understood in the manner described in Article 3(1)(b);

2. (b)

   where the options or warrants have been sold, as the maximum between zero and the difference between the following amounts:

   1. (i)

      the relevant market value of the underlying asset, which shall be taken to be either the maximum possible payment at expiry date, if it is contractually fixed, or the market value of the underlying asset or the effective notional value if no maximum possible payment is contractually fixed;

   2. (ii)

      the risk weighted delta equivalent amount, understood in the manner described in Article 3(1)(b).

The value for gamma and vega used in the calculation of own funds requirements shall be calculated using an appropriate pricing model as referred to in Article 329(1), Article 352(1) and Article 358(3) of Regulation (EU) No 575/2013 Where either gamma or vega cannot be calculated in accordance with this paragraph, the capital requirement on non-delta risks shall be calculated according to paragraph 3.