PRU A6.6.3 PRU A6.6.3
An Authorised Person using the Simplified Approach must treat the positions for the Options and the associated underlying instrument, cash or forward, and calculate the capital charge for each position, by reference to the following table:
Position Treatment Long cash and long put or short cash and long call. The capital charge is the market value of the underlying instrument multiplied by the sum of Specific and General Market Risk percentages for the underlying Instrument less the amount the Option is in the money, if any, bounded at zero. Long call or long put. The capital charge will be the lesser of:• the market value of the underlying instrument multiplied by the sum of Specific and General Market Risk percentages for the underlying instrument; or• the market value of the Options.
As an example of how the calculation would work, if a holder of 100 Shares currently valued at $10 each holds an equivalent put Option with a strike price of $11, the capital charge would be: $1,000 × 16% (i.e., 8% specific plus 8% General Market Risk) = $160, less the amount the Option is in the money ($11 - $10) × 100 = $100, i.e., the capital charge would be $60. A similar methodology applies for Options whose underlying instrument is a Foreign Currency, an interest rate related instrument or a commodity.
PRU A6.6.4(1) For the purposes of Rule A6.6.3, the Specific Risk percentage for:(a) a currency Option is 8%; and(b) an Option on commodities is 15%.(2) For the purposes of Rule A6.6.3, in the case of an Option with a residual maturity of more than six months, the strike price must be compared with the forward, not current price, or if the Authorised Person is unable to do this, then the Money amount must be taken to be zero.