Table 8: Options – Delta-plus method

Those ADIs that have obtained approval from APRA to use the delta-plus method, must complete Table 8.

ADIs using this method must first calculate the delta-equivalent position of each option. The delta-equivalent position is calculated by multiplying the market value of the underlying position by the absolute value of the delta calculated on that position.

For options with interest rate instruments as the underlying, the delta-equivalent position must be included in the positions and capital charge calculations entered in Tables 1 and 2 in accordance with the instructions applicable to interest rate instruments.

For options with equity instruments as the underlying, the delta-equivalent position must be incorporated in Table 3 in the appropriate column as part of a gross position for specific risk depending on whether the underlying instrument attracts an 8 per cent, 4 per cent or 2 per cent specific risk charge. The delta-equivalent position must also be included in Table 3 in the column entitled Net Position for General Market Risk. The specific risk and general market risk treatment should be in accordance with the instructions for Table 3.

For options with foreign exchange or gold as the underlying, the delta-equivalent position must be entered in Table 4 in accordance with reporting instructions applicable to foreign exchange and gold. Note that for an option over a currency pair not involving AUD, two delta-equivalent positions must be entered into Table 4, one corresponding to the currency bought and the other corresponding to the currency sold. For currency pairs involving AUD, only one delta-equivalent position is entered in Table 4 for the foreign currency.

For options with commodities as the underlying, the delta-equivalent position must be slotted into either the simplified method (Table 5) or the maturity ladder method (Table 6). This should be reported in accordance with instructions that apply to commodity risk.

Secondly, ADIs must calculate the gamma impact of each option as detailed in paragraphs 98 to 101 of AGN 113.3. Total gamma impacts must be calculated and reported separately for options over interest rates, equities, foreign exchange and gold, and commodities respectively in Table 8.

Thirdly, vega impacts must be calculated (using the method set out in paragraphs 102 and 103 of AGN 113.3) and reported separately in Table 8 for options over interest rates, equities, foreign exchange and gold, and commodities respectively.

Four totals will be calculated in Table 8 by adding the gamma impact and the vega impact for each of the interest rate, equities, foreign exchange and gold, and commodities categories. These four totals will also be entered on the Market Risk Summary Report at items “A d)”, “B c)”, “C c)” and “D d)” respectively.