Contingent loss method

Those ADIs that have obtained approval from APRA to use the contingent loss method must complete tables 9 to 12. The contingent loss method requires exclusion of the options and any associated hedges in the underlying instrument from the asset class calculations in Tables 1 to 6. Instead a separate capital charge is determined. A scenario matrix is constructed that contains changes in the value of the options portfolio and hedges given specified changes in underlying prices and volatility. A capital charge for general market risk is then determined by taking the largest loss that appears in the matrix.

Specific risk charges, for those options where specific risk is present, are to be separately assessed based on the delta‑equivalent amount of each option. For options with interest rate instruments as the underlying, the delta-equivalent positions must be included in the positions and capital charge calculations entered in Table 1. For equity options the delta-equivalent position must be included in Table 3 as part of the gross position for specific risk.