For the calculation of potential future credit exposure, when should the notional amount be used and when the underlying value? Which notional amount should be used: Notional of the derivative contract or notional of the underlying?
Example: Stock Option Stock Market Price: 100 Strike Price of the Option: 40 Number of Shares per Option contract: 10 Maturity of the contract: 6 months A credit institution buys 1 contract in the above option. Assuming there is no time value of the contract, the market price (option premium) would be 60. This gives the following values: Contract notional amount: 1 contract x 10 shares x 40 (notional) = 400 Contract market value: 1 contract x 10 shares x 60 = 600 Underlying nominal (= underlying market value): 1 contract x 10 shares x 100 (current market price) = 1000 Since the CRR should harmonize the calculation, we would expect no differences anymore, but the CRR is not clear what to use in that point.
According to Article 274(2) of Regulation (EU) No. 575/2013 (CRR), the potential future credit exposure is the product of the notional amount or underlying value and a percentage according to the table.
The notional amount or underlying value for derivatives of different asset classes should be determined as follows:
The example from the background section refers to a call option on a stock and provides a notional amount. Thus, the potential future credit exposure should be based on the notional amount , given by:
Notional amount x number of shares x Percentage: 40 x 10 x 6% = 24 .
Update 16.09.2021: This Q&A has been archived in light of the change(s) in Article 274 to Regulation (EU) No 575/2013 (CRR), applicable from 28.06.2021.