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2018 Pillar 3 Disclosures
Annex
The most immediate way of measuring the risk of
these options is through their Delta, a parameter
which approximates the risk of an option as an
equivalent position in another simpler (linear)
instrument.
However, the non-linear nature of the value of options
makes it advisable, particularly in complex options, to
perform the additional monitoring of other parameters
which affect the value of the option, which are also
described below:
•
Delta Risk
The Delta parameter measures the variation in the
value of the option which occurs when the price
of the underlying asset varies by one point. The
Delta risk thus refers to the exposure to unexpected
changes in the value of the options portfolio as a
result of movements in the prices of the underlying
instruments.
•
Gamma Risk
The Gamma of an option measures the sensitivity of
its Delta to a variation of one point in the price of
the underlying asset. It represents the risk that the
Delta position of an options portfolio might vary as
a result of a change in the prices of the underlying
instruments.
•
Vega Risk
Vega is a measurement of the sensitivity of the
value of the option as a result of a change of one
percentage point in the volatility of the price of the
underlying asset.
•
Theta Risk
The Theta risk is related to a reduction in the value
of positions in options as a consequence of the
passage of time.
The Delta and Vega risks are measured by means of
the parametric VaR, while in order to measure the
options risk the Historical Simulation VaR is used, as
this methodology performs complete re-evaluations
thereof.
For operations in certain types of exotic and complex
options, for which management and measurement of
the risk proves highly complex, the general policy is
to eliminate this risk from the portfolio by means of
the arrangement of back-to-back operations in the
marketplace.
Measurement of market risk
There follows a description of the methodology
employed for the measurement of market risk.
For the portfolio of financial assets at fair value through
changes in other comprehensive income, the VaR is
also calculated and tracked in the same way as for the
trading book, although for the moment no market risk
limits have yet been set for these portfolios.
Value at risk
As mentioned previously, the VaR is the indicator used
to establish the monitoring of limits on the exposure
to market risk. It provides one single market risk
measurement, integrating the fundamental aspects of
the risk:
•
Interest-rate risk.
•
Credit spread risk.
•
Exchange-rate risk.
•
Equities risk.
•
Volatility risk (for options).
•
Liquidity risk
VaR by historical simulation
The VaR measurement used for monitoring the
aforementioned limits is a VaR by Historical Simulation
with the following characteristics:
•
Time horizon: 1 day.
•
Confidence level: 99%.
•
Decay factor of 0.97.
•
Depth of series of 255 business days.
Calculation is performed daily, with the base currency
being the euro.
In addition to the total VaR for the Trading Room, the
measurement is obtained for the various levels and
operational units of the Financial Department.
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