EBA · 2019_4834 Rejected question

Calculation of supervisory delta and adjusted notional for digital options

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
279b, para. 1
Topic
Market risk
Submitted by
Credit institution
Submitted
2019-07-17
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Question

Despite the fact that the Basel committee in its Q&A on counterparty credit risk (march 2018), has explained that the adjusted notional should be calculated by treating them as call/put spreads where the upper and lower strike levels should be modified to reflect a 5% difference up and down to the actual strik level in the trade, this approach has not been echoed in the CRR text published as of June 2019. Instead a much simpleler approach has been described which is described in article 279b 1 (c) where the digital payoff should be taken as the adjusted notional amount. Are institutions still allowed to use the Basel committee approach as described above ?

Background

The problem is that many options can pricing wise be decomposed into vanilla and digital options. However this will only work out fine for the adjusted notional amount, if the digital options can be treated as call/putspreads.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2019_4834

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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