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).
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.
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