Q&A

Question

We would like to know your assessment of the following question:



An EUR denominated fund is holding FX options. We would like to know how the foreign currency exposure is calculated.

As an example we are looking at the following fx option:

USDSEK Put, Strike 8.45, Position -3 Options, Delta = 0.95, Nominal = 1 Mio. USD



We have seen two different calculation methods, that can be described as follows:



Method 1:

Numer of options x nominal x delta =

-3 x 1'000'000 x 0.95 = USD -2'850'000.- (EUR -2'425'531.91 with EURUSD being 1.1750).

Numer of options x nominal x delta x strike =

-3 x 1'000'000 x 0.95 x 8.45 = SEK -24'082'500 (EUR - 2'515'406.31 with EURSEK being 9.574)



Total Exposure would then be:

EUR 2'425'531.91 + 2'515'406.31 = EUR 4'490'938.22 (not taking into account + or -)



Method 2:

Same procedure for single currencies, but taking into consideration + and -.

USDSEK Short Put ==> USD Long, SEK Short ==>

EUR 2'425'531.91 - EUR 2'515'406.31 =

EUR 89'874.39



both methods vary significantly with regard to the resulting underyling exposure.



We are looking forward to hearing from you and would like to thank you for your efforts in this matter.

EIOPA answer

Long 100 USD in three months

Short 8000 SEK in three months



In euros this would be worth:

+ 80 EUR

– 100 EUR



The contract would be worth –20 EUR (or –25 USD or –1600 SEK).



Applying the USD shock



Applying the increase of the USD versus the EUR while assuming that all other FX rates remain the same, including the SEK/EUR rate implies the following change in value:

+ 100 EUR since the increase in the USD makes the long position more valuable

– 100 EUR as the SEK/EUR rate does not change



This results in a contract value of 0 EUR, a profit of 20 EUR



Applying the decrease of the USD versus the EUR while assuming that all other FX rates remain the same, including the SEK/EUR rate implies the following change in value:

+ 64 EUR since the decrease in the USD makes the long position less valuable

– 100 EUR as the SEK/EUR rate does not change



This results in a contract value of –36 EUR, a loss of 16 EUR



 



Applying the SEK shock



Applying the increase of the SEK versus the EUR while assuming that all other FX rates remain the same, including the USD/EUR rate implies the following change in value:

+ 80 EUR as the USD/EUR rate does not change

– 125 EUR as the increase in the SEK makes the short position less valuable



This results in a contract value of -45 EUR, a loss of 25 EUR