EBA · 2022_6485 Rejected question

Section 3: Delta Plus Approach

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
329 (3),352 (6), 358 (4)
Topic
Market risk
Submitted by
Individual
Submitted
2022-06-16
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Question

I’m using the delta-plus approach to calculate our own funds requirement for gamma risk which seems to be generating an excessive capital requirement relative to the overall notional value of the option contract. Using the example of a short call commodities option. Position:        -1000 K Strike ($):     3490 Delta:             -0.4072933 Gamma:         -0.005789126 Underlying ($): 3319 The formula to apply is as follows: VU: for commodity options or warrants is equal to the market value of the underlying, multiplied by the weighting indicated in point (a) of Article 360.1 of Regulation Regulation (EU) No 575/2013 Weighting:  15% VU = (1000 x -0.4072933) x 3319 x 0.15 = -$202,770 Gamma Risk = 0.5 x -0.005789126 x 202770^2  = $119,013,043 Notional Value of Contract = -1000 x 3490 = $3,490,000 GR/NVC Multiple = 34.1 or 3410% Please can you confirm my application of Annex1 – Formula to be used for the purposes of Article 5(2).

Background

I'm trying to understand whether I'm calculating the own funds requirement for gamma risk correctly (K-NPR). I have attached an excel version of my calculation.
No answer published yet.

Original source: European Banking Authority, Q&A ID 2022_6485

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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