IBANK 6.3.9 Gamma Capital Charges

(1) An Islamic banking business firm that writes options must calculate the capital charge for gamma risk (gamma capital charge) for each option position separately.
(2) To calculate gamma capital charge, calculate the gamma impact of each option in accordance with the following formula:

Gamma impact = 1/2 × gamma × VU2

where:

VU is:x
(a) for a profit rate option:
(i) if the option has a bond as the underlying — the market value of the underlying multiplied by the risk factor applicable under column 3 of table 6.6.8A; or
(ii) if the option has a profit rate as the underlying — the market value of the underlying multiplied by the assumed changes in yield in column 4 of table 6.6.8A;
(b) for options on equities and stock indices — the market value of the underlying multiplied by 8%;
(c) for options on foreign exchange, gold and silver — the market value of the underlying multiplied by 8%; or
(d) for an option on commodities — the market value of the underlying multiplied by 15%.
(3) In calculating the gamma impact for an option mentioned in the definition of VU, the firm must treat as the same underlying:
(a) for profit rates — each time band in column 2 of table 6.6.8A (with each position allocated to separate maturity ladders);
(b) for equities and stock indices — each recognised exchange;
(c) for foreign currencies, gold and silver — each currency pair, gold and silver; and
(d) for commodities — each individual commodity of a kind described in rule 6.4.2(3)(a) or (b).
(4) Each option on the same underlying described in subrules (2) and (3) will have a gamma impact that is positive or negative. The firm must add the individual gamma impacts, resulting in a net gamma impact for each underlying that is either positive or negative.
(5) To calculate the firm's total gamma capital charge, exclude gamma impacts that are positive. The total gamma capital charge is the sum of the absolute values of the net negative gamma impacts.
Derived from QFCRA RM/2015-2 (as from 1st January 2016).