EIOPA · 1419
1419
- Regulation
- Guidelines on use of internal models
- Article
- 188
- Submitted
- 2018-07-10
- Answered
- 2019-10-16
Question
We would like to know your assessment of the following question:
An EUR denominated fund is holding FX options. We would like to know how the foreign currency exposure is calculated.As an example we are looking at the following fx option:USDSEK Put, Strike 8.45, Position -3 Options, Delta = 0.95, Nominal = 1 Mio. USD
We have seen two different calculation methods, that can be described as follows:
Method 1:Numer of options x nominal x delta =-3 x 1'000'000 x 0.95 = USD -2'850'000.- (EUR -2'425'531.91 with EURUSD being 1.1750).Numer of options x nominal x delta x strike =-3 x 1'000'000 x 0.95 x 8.45 = SEK -24'082'500 (EUR - 2'515'406.31 with EURSEK being 9.574)
Total Exposure would then be:EUR 2'425'531.91 + 2'515'406.31 = EUR 4'490'938.22 (not taking into account + or -)
Method 2:Same procedure for single currencies, but taking into consideration + and -.USDSEK Short Put ==> USD Long, SEK Short ==>EUR 2'425'531.91 - EUR 2'515'406.31 =EUR 89'874.39
both methods vary significantly with regard to the resulting underyling exposure.
We are looking forward to hearing from you and would like to thank you for your efforts in this matter.
Answer
Long 100 USD in three monthsShort 8000 SEK in three months
In euros this would be worth:+ 80 EUR– 100 EUR
The contract would be worth –20 EUR (or –25 USD or –1600 SEK).
Applying the USD shock
Applying the increase of the USD versus the EUR while assuming that all other FX rates remain the same, including the SEK/EUR rate implies the following change in value:+ 100 EUR since the increase in the USD makes the long position more valuable– 100 EUR as the SEK/EUR rate does not change
This results in a contract value of 0 EUR, a profit of 20 EUR
Applying the decrease of the USD versus the EUR while assuming that all other FX rates remain the same, including the SEK/EUR rate implies the following change in value:+ 64 EUR since the decrease in the USD makes the long position less valuable– 100 EUR as the SEK/EUR rate does not change
This results in a contract value of –36 EUR, a loss of 16 EUR
Applying the SEK shock
Applying the increase of the SEK versus the EUR while assuming that all other FX rates remain the same, including the USD/EUR rate implies the following change in value:+ 80 EUR as the USD/EUR rate does not change– 125 EUR as the increase in the SEK makes the short position less valuable
This results in a contract value of -45 EUR, a loss of 25 EUR
This Q&A is published by European Insurance and Occupational Pensions Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.
Similar Q&As
📋 Track EU financial regulation continuously
Forseti monitors EU financial regulation and delivers personalised alerts anchored to verified official sources.
14-day free trial. No credit card required.