Question
Annex V - portfolio 1.16 (Double no touch option): Not only is the option worthless, it also knocks out immediately given the current level of spot (1.13). For the 2014 exercise, the level of spot meant that the option was in-the-money at the time of trade entry, however, it appears that the barrier levels have not been updated. As a result, unless the barrier levels are updated, systems may not allow the trade to be booked (it ceases to exist). How should firms handle this? Annex V - portfolios 1.17 and 1.18. What is the underlying currency (which is different from the reference currency) of portfolios 1.17 and 1.18 for Commodity? Are the risk factors for these trades specified in USD or EUR? For example, are the oil put options priced using USD WTI (spot and volatility)? If priced using EUR risk factors, the trades will create cross currency basis risk which will need to be included in the VaR results.
Background on the question
Please see above
Answer
With regard to the barriers of portfolio 1.16 in Annex V of the Draft ITS on Supervisory Reporting for Institutions for benchmarking the internal approaches (ITS on benchmarking), no amendment is needed. The barriers are confirmed. If this trade is valued 0, institutions are requested to provide 0. If this cannot be priced, institutions should report nothing. The two commodity portfolios 1.17 and 1.18 of Annex V have USD as base currency. DISCLAIMER: The present Q&A on Supervisory reporting is provisional. It will be reviewed after the Implementing Regulation is in force and published in the Official Journal, which may differ from the text of the draft ITS to which this Q&A relates.