Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to Banks' Financial Instrument TradingChapter 4 : Position Risk16. Treatment of options |
| (1) | Having regard to the wide diversity of banks' activities in options and the difficulties of measuring price risk for options, the following alternative approaches are allowed: |
| (a) | When options are bought, a bank shall be allowed to use the simplified approach described in regulation 17; or |
| (b) | when options are written, a bank will be expected to use the delta-plus approach, as set out in regulation 18, or a comprehensive risk-management model in terms of the provisions of chapter 7. |
| (2) | Use of the simplified approach implies that the positions for the options and the associated underlying instrument, cash or forward are not subject to the standardised methodology, but, instead, are "carved-out" and are subject to separately calculated capital charges that incorporate both market risk and specific risk. The results thus calculated shall be aggregated in order to calculate the capital requirement for the relevant category. |
| (3) | The delta-plus method employs the sensitivity parameters or "Greek letters" associated with options in order to measure the market risk and the capital requirement. For this method, the delta-equivalent position of each option becomes part of the standardised methodology set out in regulation 13, read with regulations 14 and 15, with the delta-equivalent amount being subject to the applicable market-risk charge. Separate capital charges are applied to the gamma and vega risks of the option positions. The delta-plus method employs the specific risk capital charges, which are determined separately by multiplying the delta-equivalent of each option by the specific risk weightings set out in regulation 18. |