Table 7: Options - Simplified method

The simplified method may only be used by those ADIs handling a limited range of purchased options. The method requires that options and any associated underlying positions be excluded from the asset class calculations detailed in tables 1 to 6. Instead a separate capital charge is calculated for each option portfolio.

The method for calculating the capital charge on an options position depends on whether the position is covered or naked. Option positions, which are partially covered, should be separated into a fully covered position and a naked position.

For both covered and naked positions, if positions do not fall within the trading book, for example options on certain foreign exchange or commodities positions, ADIs may use the book value rather than market value.

For each asset class (interest rates, equities, foreign exchange and commodities) report the capital charge (refer to paragraphs 91 and 92 of AGN 113.3) for the following positions separately:

Covered positions: purchased put and long underlying

purchased call and short underlying

Naked positions: purchased put

purchased call

The sum of the capital charges for all positions within each asset class will be reported in the totals. These totals for each asset class will then be entered on the Market Risk Summary Report at items “A c)”, “B b)”, “C b)” and “D c)” respectively.