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PIB A5.6.9 Guidance

1. The underlying financial instrument or commodity should be taken to be the asset which would be received if the option were exercised. In addition, the notional value should be used for items where the market value of the underlying financial instrument or commodity could be zero (e.g. caps and floors, swaptions). Certain notional positions in zero-specific-risk securities do not attract Specific Risk, e.g. interest rate and currency swaps, Forward Rate Agreement (FRA), forward foreign exchange contracts, interest rate futures and futures on an interest rate index. Similarly, options on such zero-specific-risk securities also bear no Specific Risk. For the purposes of this sub-paragraph:
a. the specific and general risk weights in respect of options on interest rate-related instruments are determined in accordance with PIB section A5.2;
b. the specific and general risk weights in respect of options on equities and equity indices are determined in accordance with PIB section A5.3;
c. the risk weight in respect of foreign currency and gold options is 8%; and
d. the risk weight in respect of options on commodities is 15%.
For options with a residual maturity of more than 6 months, the strike price should be compared with the forward, and not current, price. Where an Authorised Firm is unable to do this, the in-the-money amount would be zero.
2. An Authorised Firm which trades in exotic options (e.g. barriers, digitals) would use either the scenario approach or the Internal Models Approach (IMA) to calculate its Market Risk Capital Requirement for such options, unless it is able to demonstrate to the DFSA that the Delta-plus method is appropriate. In the case of options on futures or forwards, the relevant underlying is that on which the future or forward is based (e.g. for a bought call option on a June 3-month bill future, the relevant underlying is the 3-month bill).
Derived from RM111/2012 (Made 15th October 2012). [VER20/12-12]