Related provisions for BIPRU 7.9.27

American option, European option, Bermudan option, Asian option or warrant for which the in the money percentage (see BIPRU 7.6.6R) is equal to or greater than the appropriate position risk adjustment (see BIPRU 7.6.7R and BIPRU 7.6.8R)

Calculate either an option PRR, or the most appropriate to the underlying position of:

• an equity PRR; or
• an interest rate PRR; or
• a commodity PRR; or
• a foreign currency PRR; or
• a collective investment undertaking PRR.

American option, European option, Bermudan option, Asian option or warrant:

• for which the in the money percentage (see BIPRU 7.6.6R) is less than the appropriate position risk adjustment (see BIPRU 7.6.7R and BIPRU 7.6.8R); or
• that is at the money; or
• that is out of the money.

Calculate an option PRR

All other types of option listed in BIPRU 7.6.18R (regardless of whether in the money, at the money or out of the money).

Equity

Option (warrant) on a single equity or option on a future/forward on a single equity

A notional position in the actual equity underlying the contract valued at the current market price of the equity.

Option (warrant) on a basket of equities or option on a future/forward on a basket of equities

A notional position in the actual equities underlying the contract valued at the current market price of the equities.

Option (warrant) on an equity index or option on a future/forward on an equity index

A notional position in the index underlying the contract valued at the current market price of the index.

Interest rate

Option on an interest rate or an interest rate future/FRA

A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the sum of the time to expiry of the contract and the length of the period on which the settlement amount of the contract is calculated valued at the notional amount of the contract.

Option on an interest rate swap

A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the length of the swap valued at the notional principal amount.

Interest rate cap or floor

A zero coupon zero-specific-risk security in the currency concerned with a maturity equal to the remaining period of the cap or floor valued at the notional amount of the contract.

Debt securities

Option (warrant) on a debt security or option on a future/forward on a debt security

The underlying debt security with a maturity equal to the time to expiry of the option valued as the nominal amount underlying the contract at the current market price of the debt security.

Option (warrant) on a basket of debt securities or option on a future/forward on a basket of debt securities

A notional position in the actual debt securities underlying the contract valued at the current market price of the debt securities.

Option (warrant) on an index of debt securities or option on a future/forward on an index of debt securities

A notional position in the index underlying the contract valued at the current market price of the index.

Commodity

Option on a commodity or option on a future/forward on a commodity

An amount equal to the tonnage, barrels or kilos underlying the option with (in the case of a future/forward on a commodity) a maturity equal to the expiry date of the forward or Futures contract underlying the option. In the case of an option on a commodity the maturity of the position falls into Band 1 in the table in BIPRU 7.4.28R (Table: Maturity bands for the maturity ladder approach).

Option on a commodityswap

An amount equal to the tonnage, barrels or kilos underlying the option with a maturity equal to the length of the swap valued at the notional principal amount.

CIU

(These provisions about CIUs are subject to BIPRU 7.6.35R)

Option (warrant) on a single CIU or option on a future/forward on a single CIU

A notional position in the actual CIU underlying the contract valued at the current market price of the CIU.

Option (warrant) on a basket of CIUs or option on a future/forward on a basket of CIUs

A notional position in the actual CIUs underlying the contract valued at the current market price of the CIUs.

Gold

Option on gold or option on a future/forward on gold

An amount equal to the troy ounces underlying the option with (in the case of a future/forward on gold) a maturity equal to the expiry date of the forward or futures contract underlying the option.

Currency

Currency option

The amount of the underlying currency that the firm will receive if the option is exercised converted at the spot rate into the currency that the firm will sell if the option is exercised.

Bull Spread

(e.g. buy 100 call and sell 101 call)

One purchased option

(treat under BIPRU 7.6.20R)

Bear Spread

(e.g. sell 100 put and buy 101 put)

One written option

(treat under BIPRU 7.6.21R)

Synthetic Long Call

(e.g. long underlying and buy 100 put)

One purchased option

(treat under BIPRU 7.6.20R or BIPRU 7.6.24R)

Synthetic Short Call

(e.g. short underlying and sell 100 put)

One written option

(treat under BIPRU 7.6.21R or BIPRU 7.6.24R)

Synthetic Long Put

(e.g. short underlying and buy 100 call)

One purchased option

(treat under BIPRU 7.6.20R or BIPRU 7.6.24R)

Synthetic Short Put

(e.g. buy underlying and sell 100 call)

One written option

(treat under BIPRU 7.6.21R or BIPRU 7.6.24R)

Long Straddle

(e.g. buy 100 call and buy 100 put)

One purchased option

(treat under BIPRU 7.6.20R)

Short Straddle

(e.g. sell 100 call and sell 100 put)

One written option

(treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money)

Long Strangle

(e.g. buy 101 call and buy 99 put)

One purchased option

(treat under BIPRU 7.6.20R)

Short Strangle

(e.g. sell 99 call and sell 101 put)

One written option

(treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money)

Long Butterfly

(e.g. buy one 100 call, sell two 101 calls, and buy one 102 call)

One purchased option

(treat under BIPRU 7.6.20R)

Short Butterfly

(e.g. sell one 100 put, buy two 101 puts, and sell one 102 put)

One written option

(treat under BIPRU 7.6.21R but with no reduction for the amount the option is out of the money)

American option

An option that may be exercised at any time over an extended period up to its expiry date.

Option standard method or option hedging method if appropriate

European option

An option that can only be exercised at expiry.

Bermudan option

A cross between an American option and European option. The Bermudan option can only be exercised at specific dates during its life.

Asian option

The buyer has the right to exercise at the average rate or price of the underlying over the period (or part of the period) of the option. One variant is where the payout is based on the average of the underlying against a fixed strike price; another variant is where the payout gives at expiry the price of the underlying against the average price over the option period.

Option standard method or option hedging method if appropriate

Barrier option

An option which is either cancelled or activated if the price of the underlying reaches a pre-set level regardless of the price at which the underlying may be trading at the expiry of the option. The knock-out type is cancelled if the underlying price or rate trades through the trigger; while the knock-in becomes activated if the price moves through the trigger.

Corridor option

Provides the holder with a pay-out for each day that the underlying stays within a defined range chosen by the investor.

Ladder option

Provides the holder with guaranteed pay-outs if the underlying trades through a pre-agreed price(s) or rate(s) at a certain point(s) in time, regardless of future performance.

Lock-in option

An option where the pay-out to the holder is locked in at the maximum (or minimum) value of the underlying that occurred during the life of the option.

Look-back option

A European style option where the strike price is fixed in retrospect, that is at the most favourable price (i.e. the lowest (highest) price of the underlying in the case of a call (put)) during the life of the option.

Forward starting option

An option that starts at a future date.

Compound option

An option where the underlying is itself an option (i.e. an option on an option).

Option standard method or option hedging method if appropriate

Interest rate cap

An interest rate option or series of options under which a counterparty contracts to pay any interest costs arising as a result of an increase in rates above an agreed rate: the effect being to provide protection to the holder against a rise above that agreed interest rate.

Option standard method, but no reduction for the amount the option is out of the money is permitted

Interest rate floor

An interest rate option or series of options under which a counterparty contracts to pay any lost income arising as a result of a fall in rates below an agreed rate: the effect being to provide protection to the holder against a fall below that agreed interest rate.

Performance option

An option based on a reference basket comprising any number of assets, where the pay-out to the holder could be one of the following: the maximum of the worst performing asset, or 0; the maximum of the best performing asset, or 0; the maximum of the spreads between several pairs of the assets, or 0.

Option standard method or option hedging method - using the highest position risk adjustment of the individual assets in the basket

Quanto

Quanto stands for "Quantity Adjusted Option". A quanto is an instrument where two currencies are involved. The payoff is dependent on a variable that is measured in one of the currencies and the payoff is made in the other currency.

Subject to BIPRU 7.6.31R, the option standard method

Cliquet option

A cliquet option consists of a series of forward starting options where the strike price for the next exercise date is set equal to a positive constant times the underlying price as of the previous exercise date. It initially acts like a vanilla option with a fixed price but as time moves on, the strike is reset and the intrinsic value automatically locked in at pre-set dates. If the underlying price is below the previous level at the reset date no intrinsic value is locked in but the strike price will be reset to the current price attained by the underlying. If the underlying price exceeds the current level at the next reset the intrinsic value will again be locked in.

Option standard method for a purchased cliquet, or the method specified in BIPRU 7.6.30R for a written cliquet

Digital option

A type of option where the pay-out to the holder is fixed. The most common types are all-or-nothing and one-touch options. All-or-nothing will pay out the fixed amount if the underlying is above (call) or below (put) a set value at expiry. The one-touch will pay the fixed amount if the underlying reaches a fixed point any time before expiry.

The method specified in BIPRU 7.6.29 R

Any other option or warrant

The method specified for the type of instrument whose description it most closely resembles.

An equity (hedging an option or warrant)

The equity must be treated in either BIPRU 7.3 (equity PRR) or the option hedging method (see the table in BIPRU 7.6.27R)

The option hedging method must only be used up to the amount of the hedge that matches the notional amount underlying the option or warrant

To the extent that the amount of the hedge (or option or warrant) exceeds the notional amount underlying the option or warrant (or hedge), a firm must apply an equity PRR, interest rate PRR or foreign currencyPRR (or the option standard method)

A debt security (hedging an option or warrant)

The debt security must be treated in BIPRU 7.2 (interest rate PRR) or the option hedging method (see the table in BIPRU 7.6.27R)

As for the first row

As for the first row

Gold (hedging a gold option)

The gold must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.27R)

As for the first row

As for the first row

A currency or currencies (hedging a currency option)

The currency must be treated in either BIPRU 7.5 (Foreign currency PRR) or the option hedging method (see the table in BIPRU 7.6.28R)

As for the first row

As for the first row

Option or warrantposition

In the money by more than the position risk adjustment

In the money by less than the position risk adjustment

Out of the money or at the money

Long in security or gold

Long put

Zero

Wp

X

Short call

Y

Y

Z

Short in security or gold

Long call

Zero

Wc

X

Short put

Y

Y

Z

Where:

Wp means

{(position risk adjustment-100%) x The underlying position valued at strike price}

+

The market value of the underlying position

Wc means

{(100% +position risk adjustment x The underlying position valued at strike price}

-

The market value of the underlying position

X means

The market value of the underlying position multiplied by the appropriate position risk adjustment

Y means

The market value of the underlying position multiplied by the appropriate position risk adjustment. This result may be reduced by the market value of the option or warrant, subject to a maximum reduction to zero.

Z means

The option hedging method is not permitted; the option standard method must be used.

Optionposition

In the money by more than 8%

In the money by less than 8%

Out of the money or at the money

Long calls & long puts

Zero

W_L

X

Short calls & short puts

Zero

Y

X

Where:

W_L means

(1.08% x U)

-

The market value of the underlying position

U means

The amount of the underlying currency that the firm will receive if the option is exercised, converted at the strike price into the currency that the firm will sell if the option is exercised

X means

The market value of the underlying position multiplied by 8%.

Y means

The market value of the underlying position multiplied by 8%. This result may be reduced by the market value of the option, subject to a maximum reduction to zero.

Futures, forwards or synthetic futures on debt securities

BIPRU 7.2.13 R

Futures, forwards or synthetic futures on debt indices or baskets

BIPRU 7.2.14R

Interest rate futures or forward rate agreements (FRAs)

BIPRU 7.2.18 R

Interest rate swaps or foreign currencyswaps

BIPRU 7.2.21R

Deferred start interest rate swaps or foreign currencyswaps

BIPRU 7.2.24R

The interest rate leg of an equityswap (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives))

BIPRU 7.2.27R

The cash leg of a repurchase agreement or a reverse repurchase agreement

BIPRU 7.2.30R

Cash borrowings or deposits

BIPRU 7.2.31 R

Options on a debt security, a basket of debt securities, a debt security index, an interest rate or an interest rate future or swap (including an option on a future on a debt security) (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR))

BIPRU 7.2.32R

Dual currency bonds

BIPRU 7.2.33R

Foreign currency futures or forwards

BIPRU 7.2.34R

Gold futures or forwards

BIPRU 7.2.34R

Forwards, futures or options (except cliquets) on an equity, basket of equities or equity index (unless the firm calculates the interest rate PRR on the instrument using the basic interest rate PRR calculation in BIPRU 7.3)

BIPRU 7.2.34R

Credit derivatives

BIPRU 7.11

A warrant must be treated in the same way as an option

foreign currencyforward or future

a long position denominated in the currency purchased

and

a short position denominated in the currency sold

Gold forward or future

a long position if the forward or future involves an actual (or notional) sale of gold

or

a short position if the forward or future involves an actual (or notional) purchase of gold

Equityforward or future, or option (unless the interest rate PRR is calculated under the basic interest rate PRR calculation in BIPRU 7.3)

A long position if the contract involves an actual (or notional) sale of the underlying equity

or

A short position if the contract involves an actual (or notional) purchase of the underlying equity

Foreign currencyfutures, forwards, synthetic futures and CFDs

BIPRU 7.5.11R

Foreign currencyswaps

BIPRU 7.5.13R

Foreign currency options or warrants (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6 (Option PRR)).

BIPRU 7.5.15R

Gold futures, forwards, synthetic futures and CFDs

BIPRU 7.5.16R

Gold options (unless the firm calculates a PRR on the option under BIPRU 7.6).

BIPRU 7.5.17R

Positions in CIUs

BIPRU 7.5.18R

Depository receipts

BIPRU 7.3.12R

Convertibles where:

(a) the convertible is trading at a market price of less than 110% of the underlying equity; and the first date at which conversion can take place is less than three months ahead, or the next such date (where the first has passed) is less than a year ahead; or

BIPRU 7.3.13R

(b) the conditions in (a) are not met but the firm includes the convertible in its equity PRR calculation rather than including it in its interest rate PRR calculation set out in BIPRU 7.2 (Interest rate PRR).

Futures, forwards, CFDs and synthetic futures on a single equity

BIPRU 7.3.14R

Futures, forwards, CFDs and synthetic futures on a basket of equities or equity index

BIPRU 7.3.15R

equity legs of an equityswap

BIPRU 7.3.19R

Options or warrants on a single equity, an equityfuture, a basket of equities or an equity index (unless the firm calculates a PRR on the option or warrant under BIPRU 7.6).

BIPRU 7.3.21R

Instrument

Requirement

A Debt

Maturity

0-2 years

2-5 years

>5 years

Central Government

2%

5%

13%

Qualifying debt securities

· fixed rate

8%

8%

15%

· floating rate

10%

10%

15%

Non-qualifying debt securities

· fixed rate

10%

20%

30%

· floating rate

30%

30%

30%

B Equities

· Traded on a recognised or designated investment exchange.

25%

· other

100%

C Stock position in physical commodities

· Physical positions associated with firm'sinvestment business

30% of realisable value

D Derivatives

· Exchange traded futures and written options

4 x initial margin requirement.

· otc futures and written options

Apply the appropriate percentage shown in Sections A, B, & C above to the market value of the underlying position.

· Purchased options

Apply the appropriate percentage shown in Sections A, B & C above to the market value of the underlying position but the result may be limited to the market value of the option.

· Contracts for differences

20% of the market value of the contract.

E Other investments

· units in regulated collective investment schemes

25% of realisable value.

· with profit life policies

20% of surrender value.

· other

100% of the value of investment or underlying instrument.

Transaction with linear risk profile except for debt instruments.

The effective notional value (market price multiplied by quantity) of the underlying financial instruments (including commodities) converted to the firm's domestic currency.

Debt instruments and payment legs.

The effective notional value of the outstanding gross payments (including the notional amount) converted to the firm'sbase currency, multiplied by the modified duration of the debt instrument, or payment leg, respectively.

Credit default swap

The notional value of the reference debt instrument multiplied by the remaining maturity of the credit default swap.

2Nth to default credit default swap

The effective notional value of the reference debt instrument, multiplied by the modified duration of the nth to default derivative with respect to a change in the credit spread of the reference debt instrument.

Subject to BIPRU 13.5.9 R to BIPRU 13.5.10 R, financial derivative instrument with a non-linear risk profile, including options and swaptions except in the case of an underlying debt instrument.

Equal to the delta equivalent effective notional value of the financial instrument that underlies the transaction.

Subject to BIPRU 13.5.9 R to BIPRU 13.5.10 R, financial derivative instrument with a non-linear risk profile, including options and swaptions, of which the underlying is a debt instrument or a payment leg.

Equal to the delta equivalent effective notional value of the financial instrument or payment leg multiplied by the modified duration of the debt instrument, or payment leg, respectively.

Forwards, futures, CFDs, synthetic futures and options on a single commodity (unless the firm calculates a PRR on the option under BIPRU 7.6 (Option PRR))

BIPRU 7.4.8R

A commitment to buy or sell a single commodity at an average of spot prices prevailing over some future period

BIPRU 7.4.10R

Forwards, futures, CFDs, synthetic futures and options on a commodity index (unless the firm calculates an PRR on the option under BIPRU 7.6)

BIPRU 7.4.13R - BIPRU 7.4.14R

Commodityswaps

BIPRU 7.4.16R - BIPRU 7.4.17R

A warrant relating to a commodity must be treated as an option on a commodity.