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Over the Counter Options User Manual

1. Currency Financial Centre Interest Schedules E H Start Date Frequency Frequency Units No of Schedules Adhere To Month End Amount Compounding Indicator o o o lt Schedule Holiday Revision Revision Holiday All the schedules will have the same payment method advance or arrears The computation start and end dates coincide with the period start and end dates respectively You can view the modified exploded interest and the rate revision schedule split on this screen Click Explode button on the Interest Schedules screen The system re picks the interest and rate revision schedules This happens only if the schedule details for settlement and rate revision are updated Use Edit button to modify the details before you explode the schedules Once the details are updated you can view the modified details on Schedule and Revision sub screens Click Schedule button to view the Interest Split screen interest Split Interest Schedules E Period Start Date Period End Date o EAI a ORACLE Similarly you can view the Revision Split screen by clicking Revision button Revision Split Revision Schedules Rate Code Rate source Tenor Code SWIFT Indicator Reset Date Auto Pickup r The Revision tab is used for the payment of settlement amount at maturity Interest Schedules Component Leg Type Contrac
2. Cash Settled where the counterparties are only expected to exchange money on exercise of the swaption 2 2 3 Currency Options COs A currency option gives the holder the right but not the obligation to buy a specific currency against another specific currency at a pre agreed rate on or before a pre specified future date Apart from plain vanilla currency options the OTC Options module of Oracle FLEXCUBE also supports exotics in the form of binary digital and no touch options Barrier options options that get knocked in or knocked out under pre specified conditions are also supported Currency options can have either of the following expiration styles e Physically Settled where the counterparties are obliged to enter into a spot foreign exchange deal on exercise of the swaption e Cash Settled where the counterparties are expected to exchange money on exercise of the option 2 3 Dependencies The OTC options module interacts with the Foreign Exchange and Derivatives modules in Oracle FLEXCUBE for the generation of FX contracts and interest rate swaps on the exercise of currency options and swaptions respectively It also interacts with the Settlements Messaging ICCF Brokerage Tax and MIS sub systems 2 3 ORACLE 3 1 3 General Maintenance Introduction As part of the general maintenance required for the successful functioning of the OTC Options module you should maintain e Branch Parameters e
3. Foreign Exchange Product Option Style 4 1 3 1 Specifying Currency Options You will need to specify the following attributes about Currency Options Option Type Indicate whether the currency option you are defining is a Call option or a Put option e A call option gives the buyer the right to buy a specified quantity of a certain currency contract currency against another counter currency at a specified exchange rate on or before a pre specified future date If on the specified future date the market exchange rate is lower than the rate specified in the call option the buyer will not exercise the right and instead buy the contract currency at the more favorable market rate e A put option gives the buyer the right to sell a specified quantity of a certain currency contract currency against another counter currency at a specified exchange rate on or before a pre specified future date If on the specified future date the market exchange rate is higher than the rate specified in the put option the buyer will not exercise the right and instead sell the contract currency at the more favorable market rate Currency Options thus protect the buyer against adverse exchange rate movements while giving the buyer the benefit of favorable exchange rate movements 4 10 ORACLE The buyer s pay off for a call option can be graphed as follows Op tion iow Exchange Rate The buyer s pay off for a put option can be gr
4. Recognition of total revaluation Income PUR_REVL_LOSS WRI_REVL_LOSS Recognition of total revaluation Expense PUR_INCEP_GAIN WRI_INCEP_LOSS Recognition of Inception Gain Loss PUR_INCEP_LOSS WRI_INCEP_GAIN Recognition of Loss Gain Option Premium 0O Last Revaluation Gain Last Revaluation Loss Inception TV TV amortized till date Current Revaluation Gain After triggering revaluation process at Exercise Current Revaluation Loss After triggering revaluation process at Exercise PUR_INCEP_TV Time Value at Inception Hedge Deals Only except collars Trade deals Only Option Premium Inception Fair Value Inception Fair Value Option Premium Settlement amount Calculated at EXER event for purchased options 1 29 Final Exercise for Collars with Floor in the money Trade deals only Final Exercise for Collars with Floor in the money Trade deals only Final Exercise Trade deals only Final Exercise Trade deals only Remaining Time Value Final Exercise Trade deals only Final Exercise Only Trade deals only Trade deals Only Both Hedge and Trade deals E WRI_SETL_AMT re E PUR_CAP_AMT KNIN KIST KNOT PUR REBATE AMT WRI_REBATE_AMT PUR REBATE AMT WRI_REBATE_AMT Settlement amount Calculated at EXER event for Written Options Trade deals only Settlement amount Calculated at EXER event for Collars if Floor is in the
5. Now suppose on 10 Sep 2002 the spot rate touches or crosses 53 INR USD The option will be Knocked Out and a pre specified rebate of 100 AUD will be paid at maturity On Knock Out deferred intrinsic value and the remaining time value is recognized as Expense Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY PUR REBATE REC PUR REBATE AMT AUD 10 Sep 02 PUR _OPT_INCOME PUR REBATE AMT AUD 10 Sep 02 8 11 ORACLE Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY PUR_HED_EXPENSE PUR_INCEP_IV 2000 INR 10 Sep 02 PUR_IV_DEF PUR_INCEP_IV 2000 INR 10 Sep 02 Remaining amortization of time value is done at the time of the option getting knocked out and the total expense is moved to the main option expense GL REVL on Knock Out TV amortized Till date 142 86 INR Total TV to be amortized 500 INR Current TV to be amortized 500 142 86 357 14 INR Accounting Role Amount Tag FCY Amount FCY CCY Date EXP_ON_HEDGE NET_AMORT_TV 357 14 INR 10 Sep 02 PUR_TV_DEF NET_AMORT_TV 357 14 INR 10 Sep 02 Moving Inception TV to final Expense GL from Revaluation Expense GL Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_HED_EXPENSE PUR_INCEP_TV INR 10 Sep 02 EXP_ON_HEDGE PUR_INCEP_TV INR 10 Sep 02 Event KNST Knock Out Settlement In the above case the rebate is actually received on the maturity date of the contract Accounting entries posted on the maturity i e 31 Dec 2002 are Dr
6. Risk percent will be computed by comparing the tenor Maturity date Value date of the contract with the tenor slabs in risk percent maintenance Risk category used for comparison will be the risk category defined in customer maintenance for the counterparty of the derivatives and options contract Product used for comparison will be the product for the contract If there is no risk maintenance for the particular category and product product will be replaced by ALL and risk percent for contract tenor customer category and product ALL will be arrived at Module used for find out the risk percent will be DV for derivatives Various combinations possible for find out risk percentage in order of preference are OT Customer Category Product OT Customer Category ALL 5 9 ORACLE 5 2 3 An error message will be raised if Risk Weighted Limit Tracking is checked and risk percentage cannot be arrived at Risk percent once arrived at will be stored and the contract level and will be used to compute the risk weighted amount for limit tracking Any future amendment of risk percentage in risk percentage maintenance will not affect the risk weighted amount of the contract and it will remain the same throughout the life cycle of the contract Limits Utilization for the Notional Amount and the Risk Weighted amount will be done against the in contract currency for all types of options Specifying Details Specific to Currency
7. 31 Mar 2002 75 000 000 8 00 7 25 180 Counterparty 30 Sep 2002 Rate fixing 6M Payment Paid by Payment date LIBOR date 700 30 Sep 2002 75 000 000 8 00 7 50 180 Counterparty 31 Mar 2003 360 100 Collars A collar is a combination of a purchased cap and a written floor This enables the buyer to lock in to an interest rate band As discussed above a floating rate borrower buys a cap to protect herself against a rise in interest rates above the strike rate The price of this protection is the premium she pays for the cap The cap of course allows her to go on enjoying the benefits if market reference interest rates remain below the strike rate in such events she does not exercise the cap and uses market rates to apply to her borrowings However if she has a view that market rates are not likely to fall below a certain rate which is below the cap strike rate then she may choose to forgo part of the benefits of low market rates in return for a reduction in the premium that she pays for the cap She achieves this by simultaneously writing a floor the strike rate of which is lower than the strike rate of the cap that she has purchased She is of the view that market interest rates are unlikely to go below the strike rate of the floor and therefore the floor has little probability of being exercised by the counterparty The premium that she receives on the floor partially offsets her premium outg
8. 6 M USD LIBOR is 4 Options Bank has to pay Sarah Williams a sum of 1 000 000 X 0 05 0 04 X 183 360 5 083 33 USD Had USD LIBOR for the period July 01 December 31 2003 been 5 5 Sarah Williams would not have exercised the Call IRO Notional principal Contract amount This is the underlying principal amount based on which payments or receipts for an IRO are calculated It is notional since the IRO contract contains no obligation for either counterparty to lend or borrow funds at the contracted rate In the previous example the notional principal is 1 000 000 USD Premium This is the upfront fee or price paid by the option buyer to the option writer This is sometimes expressed as a percentage of the notional principal contract amount The premium is usually payable on the same day when the option deal is struck or within two business days from the deal date Transaction date Deal date Trade date This is the business day on which the option deal is entered into Interest period The interest period or the contract period is the duration for which the underlying interest rate is to apply and is the tenor basis on which the settlement amount is computed This is the period between the value date and the maturity date In the previous example the interest period is between July 01 and December 31 2003 8 23 ORACLE Value date Effective date This is the business day which is the first day of the i
9. Exercise Settlement Accounting Role Amount Tag CUSTOMER PUR_SETL_AMT PUR_OPT_ SET REC PUR_SETL_AMT WRI_OPT_SET PAY WRI_SETL_AMT CUSTOMER WRI SETL_AMT Following entries are passed for settlement of Payout in case of Floor being in the money 7 5 8 EXPR Contract Expiry No entries required for intermediate expiry Only final Expiry has entries Trigger Reval 0 as the value of the option would be 0 on expiry for Trade contracts Trigger AMRT for residual Amortization of inception gain for Trade Entries for moving all Reval Gain Loss to Income Expense and Inception Gain to Income Accounting Role Amount Tag RV_GAIN PUR_OPT PUR_REVL_ GAIN PUR_OPT_INCOME PUR_REVL_GAIN RV_GAIN_WRI_OPT_ WRI_LREVL_GAIN WRI_OPT_INCOME WRI_REVL_GAIN Accounting Role Dr Cr PUR _OPT_EXPENSE Debit RV_LOSS_ PUR_OPT Credit WRI_OPT_ EXPENSE Debit RV_LOSS_ WRI OPT Credit PUR_IN_GAIN_OPT PUR_INCEP_GAIN PUR_OPT_INCOME PUR_INCEP_GAIN Credit WRI_IN_GAIN_OPT Debit WRI_IN_GAIN_OPT Credit PUR_OPT_EXPENSE Debit PUR_INCEP_LOSS Credit WRI_OPT_EXPENSE Debit WRI_INCEP_LOSS Credit For Hedge deals Amortization of TV should have been completed before Final Expiry Only Inception IV entries are passed Accounting Role Amount Tag Dr Cr PUR_HED EXPENSE PUR_INCEP_IV Debit PUR_IV_DEF PUR_INCEP_IV Credit 7 5 9 AMDG Amortization of Deferred Gains Hedge This event is meant only for Hedge deals Accounting Role Amount
10. PUR REVL_ LOSS PUR LAST REVAL GAIN WRI_LAST_REVAL_GAIN PUR_LAST_REVAL_LOSS WRI_LAST_REVAL_LOSS NET AMORT_TV Hedge Deals PUR_REVL_GAIN iaa WRI_REVL_ GAIN ON EXPR This will be 0 on Knock Out Current Revaluation Gain After triggering revaluation process at Knock Out Current Revaluation Loss This will be option premium on knock Out After triggering revaluation process at Knock Out Inception gain Amt Remaining Inception Gain amortized till date Option Premium Inceptinon Fair Value Inception Fair Value Option Premium Since the option expires worthless Option Premium 0 Option premium is the revaluation gain for written options Last Revaluation gain Last revaluation Loss Inception TV TV amortized till date Remaining Time Value Current Revaluation Gain This will be O on expiry After triggering 1 21 Amount Tag Value revaluation process at Recognition of reval Income PUR REVL_ LOSS WRI_REVL_LOSS Recognition of reval Expense AMRT ON PUR_NET_INCEP_GAIN Ae WRI_NET_INCEP_GAIN PUR_INCEP_GAIN WRILINCEP_LOSS Recognition of Inception Gain Loss PUR_INCEP_LOSS WRI_INCEP_GAIN Recognition of Loss Gain AMDG ON Expiry NET GAIN DEF Amortization of Deferred termination Gains 7 6 Advices Generated Expiry Current Revaluation Loss After triggering revaluation process at Expiry Inception gain Amt amor
11. at this rate or a rate lower if put or higher if call than this rate In the previous example the strike rate is 5 8 24 ORACLE Intrinsic value The intrinsic value of an IRO contract on any given day is the pay off to the option holder if the option is exercised on that day Refer to the pay off diagrams earlier in this section Time value Apart from the intrinsic value the value of an option also contains another a probabilistic component which is based on a forecast of the possible movement of the reference underlying rate over the time left till maturity This component of the option s value called the time value is a function of the volatility of the underlying and the time to expiry Time value is determined by Oracle FLEXCUBE as the user entered fair value of the option less its intrinsic value Settlement amount This is the amount payable by the writer to the holder on the settlement date when the option is exercised The exact quantum of the settlement amount is shown below As can be seen the strike rate is compared to the reference rate on the settlement date The settlement date can be the maturity date of the contract end of the interest period or the value date of the contract beginning of the interest period If the contract is settled on the value date the amount that changes hands is the discounted present value of the settlement amount Option Type Settlement on Maturity Date Sett
12. o CON _ DELTA OFF PREV DELTA AMT Counter CCY 7 9 15 and Amount Amount CON _ ANT DEL AC PREV ANTI DELTA AMT Debit Contract CCY and Amount CON _ANT DEL OFF PREV _ANTIL DELTA AMT Credit Contract CCY and Amount For all the delta entries mentioned above the amount will be Contract CCY Amt Counter CCY Amount delta factor depending on the WRI PUR and CALL PUT combination Event wise Amount Tags Given below is a list of event wise Amount Tags which can be used for the OTC module Entries in blue Italics are meant only for hedge deals Entries in pink can be used for Hedge as well as Trade deals Also note for hedge deals entries are relevant for only purchase options Collars are not allowed for hedge deals PUR_OPTION_ PREM WRI_OPTION_PREM PUR_INCEP_GAIN PUR_INCEP_GAIN_DEF WRI_INCEP_LOSS PUR_INCEP_LOSS WRI_INCEP_GAIN WRI_INCEP_GAIN_DEF PUR_INCEP_IV BOOK PUR_INCEP_TV PUR_INCEP_TV_DEF PRPT PUR_OPTION_PREM WRI_OPTION_PREM Trade Deals Trade Deals Trade Deals Hedge Deals Hedge Deals Hedge and Trade Deals User Input Option Premium at Inception Inception Fair Value Option Premium Option Premium Inception Fair Value Intrinsic Value at Inception System Calculated Time Value at Inception System Calculated User Input Option Premium at Inception AMRT PUR NET _INCEP_ GAIN WRI_NET_INCEP_ GAIN Inception Gain to Amortize till date Gain already amort
13. option is in the money For European expiration style Only on Contract maturity date Settlement payment is always a fixed amount Digital European only Manual or Only on Contract maturity date ue Settlement payment is always a fixed amount No European only Auto only Only on Contract maturity date Tougn Settlement payment is always a fixed amount 5 14 ORACLE 5 2 5 Specifying Details Specific to Interest Rate Option For entering contract details specifically pertaining to interest rate option contracts migrate to the Interest Rate Options tab of the Options Contract Input screen Options Contract Input Wafa o gt pil Product External Reference Product Description Contract Reference Product Type User Reference Description Source Code FLEXCUBE asl Product Type Le Main Currency Options Interest Rate Options Contract Details Reversed Reference Interest Rate Options Caps iy Type Rate Details Reference Rate Details Cap Strike Rate Spread Floor Strike Rate Rate Code Corridor Purchase Cap Rate Source Rate Rate Tenor Code Corridor Sell Cap Rate Swaption Details Swaption Reference Swaption Style Physical Swaption Value Date Cash Settled External Events Bermudan Sen interest scneaue broxerage Settement Aavce Charge ax wis reas Input By Authorized By Contract Au
14. while a lender will be adversely affected by a fall in floating rates An IRO gives the buyer the right but not the obligation to fix the rate of a notional underlying loan or deposit for a specified period commencing on a specified date Thus the buyer of an IRO is protected against the interest rate rising above if she is a borrower or falling below if she is a lender a specified level At the same time the buyer of an IRO can enjoy the benefits of the interest rate staying below if she is a borrower or staying above if she is a lender the specified level IROs can be of any one of the following categories e Cap an option that gives the holder right to enter into strips of notional future borrowings at a pre agreed interest rate e Floor an option that gives the holder the right to enter into strips of notional future lending at a pre agreed interest rate e Collar an option strategy that involves a purchased cap and a written sold floor e Corridor an option strategy that involves two caps purchased at different exercise prices An IRO does NOT have an implied commitment by either counterparty to exchange the notional principal at any stage so no credit has to be given no debt security purchased or deposit accepted debt security sold by either party This also means that an IRO can be entered into with a pure speculation objective rather than only with a view to hedge against adverse interest rate move
15. 31 Dec 02 Moving Inception TV to final Expense GL from Revaluation Expense GL Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_HED_EXPENSE PUR_INCEP_TV INR 31 Dec 02 Cr EXP_ON_HEDGE PUR_INCEP_TV INR 31 Dec 02 Contract Termination TERM Now let us assume that the currency option contract was terminated on 01 Sep 2002 Termination Value User I P 2700 INR Termination Gain 2700 2000 Inception IV 700 INR 8 13 ORACLE Accounting entries passed at termination Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CUSTOMER PUR_INCEP_IV 2000 INR 01 Jul 02 Dr CUSTOMER HED _TERM_GAIN INR 01 Jul 02 CR PUR_GAIN_DEF HED_TERM_GAIN INR 01 Jul 02 Event REVL at termination PUR_IV_DEF PUR_INCEP_IV 2000 INR 01 Jul 02 Remaining time value of the option is recognized as expense on termination TV amortized Till date 142 86 INR As on 01 Aug 2002 Total TV to be amortized 500 INR Current TV to be amortized 500 142 86 357 14 INR Accounting Role Amount Tag FCY Amount FCY CCY Date EXP_ON_HEDGE NET_AMORT_TV 357 14 INR 01 Sep 02 PUR_TV_DEF NET_AMORT_TV 357 14 INR 01 Sep 02 Moving Inception TV to final Expense GL from Revaluation Expense GL after REVL on TERM Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_HED_EXPENSE PUR_INCEP_TV INR 01 Sep 02 EXP_ON_HEDGE PUR_INCEP_TV INR 01 Sep 02 AMDG after termination Deferred termination gain in case of hedge
16. AA 3 1 3 11 NMIGINLOINING Branch Parameters see cizesccauiaiansionseseaasiansoucoissaeiaiancionss aad EN E SARA 3 J 2 Mamtaininge Coniract T air V GIUGS sec cssc as cxvtarsiucessetsctasiasani EAEE EE 3 2 IJa Maintaining Limit Tracking Other Exposure Details cccccccccccsseccccccccceeseesssceceeecaaeessseeseeeeesaaaaeeees 3 4 4 DEFINING ATTRIBUTES SPECIFIC TO OTC PRODUCTS ccccccrcrcccccccccccccccscscscssssssccscsees 4 1 4 1 TINTON UC TON ea E teense on ate gaichaneneteneye tnameeananwasnusencoaeeuenssttgeres 4 1 4 1 2 Specifying OTC Product Preferences cccccccsscccccccccccnsessceceeceeeeaessseeeeeeeeeaaeseeeeeeeeeaaaaeeeeeeeeesaaaaeeseeeeeeaas 4 3 4 1 3 Specifying Currency Option Preferences scccccccccccccvseccccccceecaessececeeeeaaeeseeeeeeeaaaaeeeeceeeesaaaaseeeeeeeeaas 4 10 4 1 4 Specifying Interest Rate Option Preferences oeeeeeeesssssssssssneneessessssssssssscererersssssssssssssssssseeereeeee 4 14 4 1 5 Defining Interest Rate Option Schedules ccccccccccsssecccccccccsneesesececeeeeeeaaeeeseeeeeeeeaaeseseeeeseeeaaaaeeeeeeeeeaaaas 4 23 4 1 6 Defining Charge Components for a Product sccccccccccssssesccccceeecnnessseeeceeeeeaaeeeeeceeesaaaaeeeeeeeeeeaaaaees 4 24 4 1 7 Del mne TAXES JO T TrOAUC suiii nar iE A AAAA AENA 4 25 5 PROCESSING OTC OPTION INSTRUMENTS eeeeeeeeecccccccccecccccccccccccccccccsccecccccccccccecccccescsccececccccceseesee 5 25 5 1 TIT EID ULOIN Ei AEE E ATEA E EEA AO EA A A 5 25 5 2 ENTERING DETAILS OF
17. Accrual Details Liquidation Details Numerator Method Denominator Method v Denominator Basis C Accrual Required x x E include To Date Numerator Method Denominator Method Denominator Basis C Auto Settlement F Actual v Actual v OOo Include To Date Payment Details Rate Denominator v B C Discount Auto Pickup wane Discount Rate Source az Payment Method v m L Discount Rate Code fas Discount Rate Basis Discount Tenor Code i a v Discount Rate Spread Discount Rate Floating Component as Interest Rate Details C Main Component Rate Type M Rate Code as Interest Rate Rate Source Flat Amount Tenor Code Interest Spread Schedule Holiday Schedule Revision Revision Holiday In the Main tab of this screen you need to specify the following details Liquidation Details Select the numerator method which is used to arrive at the number of days in the liquidation cycle from the adjoining drop down list This list displays the following values e 30 Euro e 30 US e 30 ISDA e 30 PSA e Actual e Actual Japanese Also specify the denominator method which derives the number of days in the year period This can be 360 365 Actual You can choose the denominator basis to be per annum or per period These specifications
18. Branch Settlement Account Premium Details Inception Fair Value Expiration Style American Option Premium Inception Time Value European Premium Currency az Inception Intrinsic Value Bermudan Premium Percent Earliest Exercise Date Premium Pay Date E Notional amp Risk Weighted Limits Limits Maturity Holiday Details C Notional Limit Tracking C Limits Tracking Holiday Treatment Ignore Notional Line Code az anuaus Holiday Currency az J Risk Weighted Limits O ae en Financial Centre az Tracking Oe ee Holiday Movement Forward Risk Weighted Line Z a iat Code 23 Agreement Backward Risk Percent Master Agreement az C Move Across Months Code f Risk Weighted Amount Remarks Ssi Line Code laz Current Value Interest Exposure Foreign Exchange Exposure Events Bermudan scn imerest Schedule Brokerage Settement Aavce Charge Tax Ws Feas Input By Authorized By Contract Authorized Date Time Date Time Status 5 2 1 Format of Options Contract Input Screen Apart from a common header for capturing details of the product under which the contract is initiated and reference numbers for the contract the Contract Input screen has four tabs e Main for capturing details common to all OTC options e Int
19. Daily Processing 6 1 Introduction The End of Cycle EOC events constitute a set of programs which are automatically triggered during the batch processes The EOD process is designed to tie up all the operations for a financial day and prepare the system for the next day During End of Day the batch process should be run after End of Transaction Input EOTI has been marked for the day but before End of Financial Input EOFI has been marked for the day As part of running the End of Day processes for OTC Interest Rate and Currency options the system performs the following operations e Revaluation e Amortization e Auto Exercise and Rate Reset e Knock In and Knock Out Currency Options e Auto Settlement e Auto Expiry 6 2 Automatic Events Executed during End of Day 6 2 1 Revaluation REVL Revaluation of a contract is performed as per your specification for the product involving the contract If you have indicated that revaluation should be performed for the product all entries for a product will be netted based on a common currency and buy sell indicator Revaluation will be performed for the specified frequency for the following events e BOD EOD e Contract Exercise Final exercise only in case of IRO s e Contract termination e Contract Expiry The BOD operations for revaluation will run only till the previous day because in cases when the revaluation frequency falls on the current day the market value of the contr
20. Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY T ORACLE Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY a a ee ee ee 03 Moving Revaluation Gain Loss to Income Expense on Final Settlement Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_OPT_EXPENSE PUR_REVL_LOSS 1000 26 Mar 03 RV_LOSS_PUR_OPT PUR_REVL_LOSS 1000 26 Mar 03 Moving Inception Gain to Income on Final Settlement Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_IN_GAIN_OPT PUR_INCEP_GAIN 26 Mar 03 PUR_OPT INCOME PUR INCEP_GAIN 26 Mar 03 8 1 2 Example Il Currency Options On 1 June 2002 your bank buys a call option on 1000USD in terms of INR with a strike price of INR 50 and December 31 2002 as the maturity date The parameters of the deal are as follows Contract Amount 1000 Contract Currency USD Counter Currency INR Option premium 2500 INR Booking Date 1 Premium Pay Date 0 8 9 ORACLE Contract Type Strike price Current Spot Rate Option Style Expiration Style Earliest Exercise Date Oct Barrier Type Barrier Lower Barrier Rebate Payment At Barrier Window Start Date Sep Barrier Window End Date Nov Revaluation Frequency Revaluation Start Month Revaluation Start Day 50 INR USD 52 INR USD Plain Vanilla American 15 2002 Double Knock Out 53 INR USD 48 INR USD 100 AUD Maturity 01 2002 01 2002 Half Yearly August J It is assumed the local curren
21. Dr Cr PUR_HED EXPENSE PUR_INCEP_TV Debit EXP_ON_ HEDGE PUR_INCEP_TV Credit KNST Knock Out Settlement Accounting Role Dr Cr CUSTOMER Deb PUR REBATE_REC Credit PUR _REBATE_PAY Debit CUSTOMER Cre KNIN Knock In of Currency Option No entries are passed for this event If an option is not Knocked in during the Barrier Window entries for rebate will be passed on KIST at Expiry KIST Knock In Settlement Accounting Role Amount Tag Dr Cr CUSTOMER PUR_REBATE_AMT Debit PUR_OPT_INCOME PUR_REBATE_AMT Credit WRI_OPT_ EXPENSE WRI_REBATE_AMT Debit CUSTOMER WRI_REBATE_AMT Credit 7 5 14 Delta Accounting Given below is an event wise list of accounting entries for Purchase Written Call Put options For an example on Written and Call physical Currency option refer to Example III in Annexure B Contingent Entries on BOOK Written Call CON WRI CALL WRI CALL AMT Debit Counter CCY and Amount CON _ WRI CAL OFF WRI _ CALL AMT EQ Credit Contract CCY and Amount Written Put CON_WRI_PUT WRI_PUT_AMT Debit Contract CCY and Amount E CON WRI PUT OFF WRI_PUT AMT EQ Counter CCY and Amount Purchase Call CON PUR CALL PUR_CALL_ AMT Debit Contract CCY and Amount CON PUR _CAL_OFF PUR CALL AMT EQ Credit Counter CCY and Amount Purchase Put CON PUR_PUT PUR PUT AMT Debit Counter CCY and Amount Po CON PUR PUT OFF PUR PUT AMT EQ Contract CCY and Amount Reversal of continge
22. Loss After triggering revaluation process at termination PUR_INCEP TV Time Value at Inception Hedge Deals AMORT PUR_NET_INCEP_GAIN Total Amt to Amort Trade Deals ON TERM Inception gain Amt eer ae amortized till date This is the remaining inception gain AFTER PUR_INCEP_GAIN Inception Fair Value Trade Deals AMORT Inception Fair Value ON TERM WRILINCEP_LOSS Recognition of Inception Gain Loss PUR_INCEP_LOSS Option Premium Trade Deals WRI INCEP_ GAIN Inception Fair Value Recognition of Loss Gain AMDG NET GAIN_DEF Amt to Amort Amt Hedge deals Amortization of Deferred AMEME MENANG termination Gains PUR_INTR_SETL_AMT Calculated Settlement Intermediate Exercise Amt except Collars Trade and Hedge deals AFTER REVAL ON TERM PUR _REVL GAIN WRI_REVL_GAIN Recognition of total revaluation Income PUR_REVL_LOSS WRI_REVL_LOSS Recognition of total revaluation Expense WRLINTR_SETL_AMT Calculated Settlement Intermediate Exercise Amt except Collars Trade and Hedge deals Event PUR_SETL_AMT Calculated Settlement Final Exercise except Amt Collars Trade deals WRI SETL_AMT Calculated Settlement Final Exercise except Amt Collars Trade deals PUR_INTR_FLR_AMT Calculated Settlement Amt for Collars if Floor WRI_INTR_FLR_AMT is in the money PUR_INTR_CAP_AMT WRI_INTR_CAP_AMT Calculated Settlement Amt for Collars if Cap is in the money PUR_FLOOR_AMT WRI_FLOOR_AMT Calculated Set
23. OTC OPTION CONTRACT sssesceccececeeeeeeeeseeeesennnaaeeeeceeeeeeeeeeeeseeeeeaaaaaeeeeeeeeeeeees 5 2 32d Format of Options Contract Input Screen ccccccccccsssseccccccceccesessscseeceeeeeaaeeseeeeeeeeaaaaeeeeeeeeeaaaaeeeeeseeeaags 5 3 J2 Specifying Common Details Main TAD cccccccccccsssescccceccceeecaessesecceeeeaaeeseeeeeeeeaaesseeeeeeesaaaeseeeeeeeeeenaaas 5 5 IAI Specifying Details Specific to Currency OPtlOn i ccccccssceccccccccccceeesccccceceeceaaeeseeceeeeeaaaseeeecesesaaaaaeeeeees 5 10 5 2 4 Settlement Method for Currency Options ooooeeeeeeeeeessssssssseseeerneessssssssssssseeeerersssssssssssssssseseereeeeee 5 14 W Specifying Details Specific to Interest Rate Option cccccccccccsseseccccceccecaeseesecceeecaaassseeeceeeeaaaaeeeeeeeees 5 15 5 2 6 Settlement Method for TROS vscssssucsssatusadesevssasventeredasasessineepasesbesensensesberedsibsansneaseessnbsonsewweswevobneneneeece 5 23 5 3 SPECIFYING OTHER DETAILS FOR OTC OPTION CONTRACT ssssesssseeessssssrrersssssstrrerssssserreeessssssrreeeesssee 5 24 5 3 1 Processing Brokerage ON CONTAC cccccccccccccccccccsessenseeeeeeeeeeeeeeeeeeee eee e eee a sae deeseseeeeeeees eee seaaaaaaaaaaaaaaaes 5 24 5 3 2 Specifying Advices for CONLIACE sccccccccccnseeeecceeceeeeeaeeeseeeeeeeeaeeeeeeeeeeeeaaseeeeeeeeeeeeaaaeeeeeeeeeesuaaaeeeeeeeas 5 26 5 5 3 Viewing L veni Deldi lS x scictazaae scat aac acaaimaaiaaaseseataaeceyiaeisstiaaaanaaheioasauanoo te calsaaiueismanteaamasstas
24. Option For entering contract details specifically pertaining to currency option contracts migrate to the Currency Options tab of the Options Contract Input screen Options Contract Input id of e fi oe Product External Reference Product Description Contract Reference Product Type User Reference Description Source Code FLEXCUBE as Product Type Le Main Currency Options Interest Rate Options Contract Details Reversed Reference Calculation Agent fias Option Style Plain Vanilla Deal Type Call Expiry Location nal Put Rate Type laal Expiry Time HHMM Delivery Type Cash Settled Settlement Rate Source Start Location jaa Physical Spot Rate Start Time HHMM External Exotics Rebate Fixed Payment C Barrier Allowed C Rebate Allowed Fixed Amount Barrier Type Single Knock In Rebate Fixed Amount Currency az Barrier ae Rebate Currency az _ Pay Fixed Vanilla Lower Barrier PaymentAt Maturity Barrier Window Start O Hit Date Barrier Window End E Date Physical Delivery Dual Currency Deposit Foreign Exchange TD Reference Reference Evens Bermudan sen imerest Schedule Eroerage Settement Aavce Charge Tax mis reias Input By Authorized By Contract Authorized Date Time Date Time Status You can maintain the following
25. Tag Dr Cr PUR_GAIN_DEF NET GAIN_DEF Debit PUR_OPT_INCOME NET_GAIN_DEF Credit 7 5 10 KNOT Knock Out of Currency Option These entries are meant for Trade and Hedge deals Accounting Role Amount Tag Dr Cr PUR_REBATE_REC PUR_REBATE_AMT Debit Accounting Role Amount Tag Dr Cr PUR_OPT_INCOME PUR_REBATE_AMT Credit WRI_OPT_ EXPENSE WRI_REBATE_AMT Debit PUR REBATE PAY WRI REBATE AMT Credit Trigger Revaluation at 0 for Trade For Hedge do residual amortization of Time Value Trigger AMRT for residual Amortization for Trade Entries for moving all Revaluation Gain Loss to Income Expense and Inception Gain to Income Accounting Role Dr Cr RV_GAIN_PUR_OPT Debit PUR_OPT_INCOME Credit RV_GAIN_ WRI_OPT Debit WRI_OPT_INCOME Credit PUR _OPT_ EXPENSE Debit RV_LOSS_ PUR_OPT Credit WRILOPT EXPENSE Debit RV_LOSS_ WRI OPT Credit PUR_IN_ GAIN OPT Debit PUR_OPT_INCOME Credit WRI_IN_ GAIN OPT Debit WRI_IN_ GAIN OPT Credit PUR _OPT_ EXPENSE Debit PUR_INCEP_LOSS Credit WRI_OPT_ EXPENSE Debit WRIINCEP_LOSS Credit 7 9 11 7 5 12 7 5 13 For Hedge deals Amortization of TV should have been completed before Final Expiry Only Inception IV entries are passed Accounting Role Amount Tag Dr Cr PUR_HED EXPENSE PUR_INCEP_IV Debit PUR_IV_DEF PUR_INCEP _IV Credit The following entries are to move the Inception TV to Final Expense A c from Revaluation Exp A c Accounting Role Amount Tag
26. When an Option contract is invoked for authorization as a cross checking mechanism you can specify that the values of certain fields should be entered before the contract is authorized This is called the Rekey option Check the box Rekey Required to enable this option While defining the product you have to indicate the fields whose values you need to enter before a contract is authorized Thus it becomes mandatory for you to enter the values of rekey fields for all contracts linked to the product You can specify any or all of the following as rekey fields e Contract Currency e Option Premium e Counter Currency applicable only for Currency options e Maturity Date e Premium Currency e Value Date If no rekey fields have been defined the details of the contract will be displayed immediately when the authorizer calls the contract for authorization 4 9 ORACLE 4 1 3 Specifying Currency Option Preferences Since currency option preferences are specific to currency options the Currency Option tab will be displayed only if you have indicated that you would like to define products meant for Currency Options Product Preferences Product Code Description Type Description Main Currency Option Interest Rate Option Interest Rate Option Schedules Currency Options Exotics Option Type Cc Barrier Allowed Rebate Allowed Delivery Type Barrier Type Physical Payment At Hit External Maturity
27. a discount rate source Discount Rate code If you have specified the discount rate basis as Other Floating Component then you must mention the floating rate code that will be used to discount any advance payouts e g LIBOR EURIBOR etc Discount Tenor Code If you have specified the discount rate basis as Other Floating Component then you must mention the discount tenor code e g 3 month LIBOR 6 month LIBOR etc Discount Rate Spread This is the spread to be applied to the discount rate code for obtaining the discount rate for advance payments e g LIBOR 1 Interest Rate Details Here you need to specify the following details Main Component Rate Type Interest Rate Flat Amount Waiver Rate Code Select the rate code to be used from the option list On this basis the system will pick up the reference rate Rate Source Specify the source of the reference rate Reuters Telerate etc Tenor Code Interest Spread 5 18 ORACLE In the payment schedule tab the following information is displayed e Holiday treatment this is defaulted from specifications maintained as part of product preferences e Schedule details this is also defaulted from product preferences interest Schedules Component Leg Type Contract Reference Main Schedule Revision Schedule Holiday Treatment Holiday Treatment Holiday Movement Forward C Move Across Month Backward C Cascade Schedules
28. adhere to the minimum and maximum deal size that you have specified as part of product preferences Broker Specify a broker for the contract by selecting from the option list next to the field only if you have allowed brokerage while maintaining product preferences Brokerage can be paid in advance that is on the booking of the contract itself or in arrears that is on termination final exercise or expiry as the case may be Tenor The tenor of the contract is the number of days between the value date and the maturity date The tenor and the maturity date of the contract are inter related and if you specify one the value for the other is computed Contract Type This indicates whether the option contract is a hedge or a trade speculative type of contract and whether you are buying or selling writing the option These specifications default from the product under which you are initiating the contract You can modify them here An option that you are buying can be either a hedge or a trade type deal but a written option can only be a trade deal Buy or Sell Indicate the type of contract According to the nature of the contract choose Buy or Sell from the drop down menu Specifying Premium Details The option premium is the price or fee that you pay for buying an option or receive for writing an option You have to mention the amount of the premium and the currency in which the premium is denominat
29. also checks whether an FX contract is linked to a currency option with Delivery type as External Similarly it checks whether a Derivatives contract is linked to the IRO with swaption Style as External Note the following DV contract must be uploaded with Swaption contract Reference Number and must go always in the Authorised status irrespective of source preference post upload status You cannot upload more than one derivative contract for same swaption contract if you are doing this the system will throw an error Option contract already linked with DV contract Derivative reference number will display in Derivative reference number label after uploading DV contract Uploading Options Contract for Amendment From an external system you can upload contracts that require amendment in Oracle FLEXCUBE The system will distinguish between the new and the contracts that require amendment based on the action code of the uploaded record For a contract requiring amendment the action code will be AMND If the action code is AMND Oracle FLEXCUBE will first check whether the contract exists in the system or not If the contract does not exist in the system an error message will be displayed to notify that the contract cannot be amended The Reference Number provided by the external system has to same if it is a new contract or if it is an amendment to an existing contract When you upload a new contract the Re
30. as part of this User Manual orcton o roncen 10 1 ORACLE ORACLE Over the Counter Options May 2011 Version 11 3 Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores CA 94065 U S A Worldwide Inquiries Phone 1 650 506 7000 Fax 1 650 506 7200 www oracle com financial_ services Copyright 2011 Oracle Financial Services Software Limited All rights reserved No part of this work may be reproduced stored in a retrieval system adopted or transmitted in any form or by any means electronic mechanical photographic graphic optic recording or otherwise translated in any language or computer language without the prior written permission of Oracle Financial Services Software Limited Due care has been taken to make this document and accompanying software package as accurate as possible However Oracle Financial Services Software Limited makes no representation or warranties with respect to the contents hereof and shall not be responsible for any loss or damage caused to the user by the direct or indirect use of this document and the accompanying Software System Furthermore Oracle Financial Services Software Limited reserves the right to alter modify or otherwise change in any manner the content hereof without obligation of Oracle Financial Services Software Limited to notify any person of such revision or changes All company and product names are trademarks of the respective companies
31. be paid anytime between the booking date and the value date of the contract At the time of final exercise premature termination or expiry of the contract amortization gain will be recognized as income and posted to the respective GL Inception loss will not be amortized and will be recognized as an expense upon saving the options contract itself Amortization of Deferred Termination Gains AMDG Amortization of deferred termination gain is performed only if the Amortize Termination Gain option has been enabled while terminating the contract Inception gain will be amortized over the period from the contract termination date till the contract maturity date 6 2 ORACLE 6 2 3 At the time of expiry of the contract deferred termination gain will be recognized as income and posted to the respective GL Termination loss if any will not be amortized and will be recognized as an expense upon saving the option contract termination Amortization of deferred termination gains will be done only for hedge deals For trade deals termination gains will be recognized as income on the termination of the contract Amortization of Time Value REVL Amortization of Time Value is meant only for hedge deals The amortization will be done from the Value Date till the contract Maturity Date If the contract is terminated prematurely or at the time of final exercise the remaining time value will be recognized as expense and will be posted to an expense G
32. counterparty Option Premium The system defaults the option premium from the contract It is the price or fee that the user pays or receives respectively for buying or writing an option Counter Currency The system displays the counter currency on saving the contract Contract Currency The system displays the contract currency on saving the contract Confirmed The system picks up and processes only confirmed records for revaluation during the EOD batch Hence after entering the values you need to confirm the same Date On confirming the details as indicated above the system defaults the current branch date in this field The current market value of the option that you specify is always considered in the same currency as the option premium currency In order for the system to pick up only the latest fair value for revaluation a user other than the one who created or authorized the Contract Fair Value record has to confirm the new fair value Refer to Annexure A and B for accounting entries and examples pertaining to Delta Accounting 3 3 ORACLE During bulk upload of these fair values for multiple contracts Oracle FLEXCUBE expects the following information to be present in the upload message e Contract Reference No e Effective Date e Fair Value If any of these values is missing for any record the system will terminate the upload process and raise an error The single record and bulk record uploads requests a
33. details in this screen Calculation Agent This does not apply to a plain vanilla CO without barriers and marked for physical settlement For plain vanilla options which are cash settled or which have barriers knock in or knock out type options as also for binary digital and no touch options the Calculation Agent refers to the party who provides the rates to determine whether the exchange rate level s specified in the contract have been reached or not You have to mention the BIC of the calculation agent 5 10 ORACLE Refer to the Products section of this manual for explanation on different styles of currency options Rate Type Choose the rate type of the reference to be picked up The option list displays all valid rate types maintained in the system Settlement Rate Source Specify the source of the settlement rate i e Reuters Telerate etc Spot Rate This is the spot foreign exchange rate between the currency and the counter currency of the contract at the time of contract inception This is picked up and displayed from the exchange rates that you maintain as part of core maintenances Start Location This code ID indicates the financial institution where the option starts Start Time Enter a valid time in HHMM format This indicates the time when the option becomes valid Expiry Location This is the Code ID of the Financial Institution where the option expires Expiry Time This is the time at which the option
34. is organized as follows Chapter 1 About this Manual gives information on the intended audience It also lists the various chapters covered in this User Manual Chapter 2 Over The Counter Options An Overview gives a snapshot of the features that the module provides Chapter 3 General Maintenance explains the necessity of maintaining Branch Parameters Contract Fair Value details Limit Tracking details Y ORACLE 1 2 1 1 2 2 hapter 4 Defining Attributes Specific to OTC Products describes the procedure to define attributes specific to derivative products C Chapter 5 Processing OTC Option Instrument lists and explains the details of an OTC option and describes how you can capture an OTC C instrument hapter 6 Automatic Daily Processing documents the Beginning and End of Day functions that are processed by the system generated are also documented here Chapter 8 Annexure B Examples of Processing Interest Rate and Currency Options in Oracle FLEXCUBE gives examples of processing actual Interest Rate and Currency options in Oracle Chapter 7 Annexure A Event Wise Accounting Entries and Advices for your OTC Options contains an event wise list of suggested accounting entries and advices for the module The advices FLEXCUBE Chapter 9 Reports lists the possible reports that can be generated for the Module Related Documents e The Procedures User Manual e The Messaging System User Ma
35. money Trade deals only Settlement amount Calculated at EXER event for Collars if Cap is in the money Trade deals only Will be followed by KIST if Rebate is to be paid on Maturity Both for trade and Hedge Both for trade and Hedge This event will be triggered along with EXPR Expiry Rebate amount User I P at Inception Rebate amount User I P at Inception Will be followed by KNST if Rebate is to be paid on Hit or Maturity Both for trade and Hedge i PUR_INCEP_IV Inception Intrinsic Value Hedge deals only REVAL PUR _REVL GAIN an WRI_REVL_LOSS KNOT WRI_REVL_GAIN PUR REVL_ LOSS PUR LAST REVAL GAIN WRI_LAST_REVAL_GAIN PUR_LAST_REVAL_LOSS WRI_LAST_REVAL_LOSS NET AMORT_TV Hedge Deals Since the option gets Knocked Out Option Premium 0 Option premium is the revaluation gain for written options Last Revaluation gain Last revaluation Loss Inception TV TV amortized till date Remaining Time Value 7 26 PUR_REVL GAIN WRI_REVL_GAIN Recognition of reval Income AFTER REVAL ON KNOT PUR_REVL_LOSS WRI_REVL_LOSS Recognition of reval Expense AMRT ON PUR_NET_INCEP_ GAIN ANG WRI_NET_INCEP_ GAIN PUR_INCEP_GAIN WRI_INCEP_LOSS Recognition of Inception Gain Loss PUR_INCEP_LOSS WRI_INCEP_ GAIN Recognition of Loss Gain EXPR PUR_INCEP_IV Inception Intrinsic Value Hedge deals only PUR _REVL GAIN WRI_REVL_LOSS WRI_REVL_GAIN
36. only if you so indicate If not the schedule date will be kept in the same month Cascade Schedules The question of cascading schedules arises only if e You have specified that a schedule falling due on a holiday has to be moved forward or backward and e The schedule has been defined with a definite frequency If you have indicated that schedules should be cascaded the schedule date for the next payable schedule will depend on how the schedule date was moved for a holiday The following example illustrates how this concept of cascading schedules functions Example A monthly schedule has been defined with backward movement and a schedule date falling due on April 30 was moved to April 29 April 30 being a holiday The schedule date for May depends on whether you have chosen to cascade schedules If you have the schedule date for May will be set as May 29 as the frequency has been specified as monthly For the subsequent schedules also May 29 will be considered the last schedule date If you have not specified that schedules have to be cascaded the date originally specified will be the date for drawing up the schedules Even if the April month end schedule has been moved to April 29 the next schedule will remain on May 30 5 24 ORACLE 5 2 5 6 Reset Rate Details Specifications for reset rate basis reset rate movement and reset days default from the preferences you maintain at the product level You have to indicate the holi
37. preference indicates whether a rebate can be paid if a contract involving the product gets knocked out Barrier Type Choose the barrier type from the drop down menu Oracle FLEXCUBE allows you to select any one of the following e Single Knock In e Single Knock Out e Double Knock In e Double Knock Out Payment At Rebate payment for a knock out option can be made either at Hit or at Maturity When an option gets knocked out it is considered a Hit At the product level you have to indicate whether the Rebate amount has to be paid at Hit or at Maturity Foreign Exchange Product If you have chosen the delivery type is Physical it is necessary to provide the details of FX product Select the appropriate one from the option list Option Style Choose the option style from the drop down menu which displays the following values e Plain Vanilla e Binary e Digital e No Touch For details on Option Style refer the explanation on Delivery Type given above Although you have set these as preferences at the product level for a specific Currency Option you will be allowed to change the following details e Option Type e Delivery Type e Option Style e Barrier Type e Payment At 4 1 4 Specifying Interest Rate Option Preferences Interest Rate preferences are specific to Interest Rate options You will be able to access the Interest Rate tab only if you are defining interest rate products Product Preferences Produ
38. spread cannot exceed and a negative spread cannot be less than the maximum spread defined at the product level Rate Code Rate Source and Rate Tenor Code For all IROs except swaptions the settlement amount is computed by comparing the reference rate with the strike rate Therefore you need to specify the reference rate code LIBOR etc for non swaption IROs based on which the reference rate will be picked up You also need to specify the source of the reference rate Reuters Telerate etc and the tenor code for the reference rate e g 3 month LIBOR 6 month LIBOR etc 5 2 5 3 Specifying Swaption Details For a swaption you must specify whether settlement will be in the form of an exchange of money cash settled swaptions whether it will require the counterparties to enter into an interest rate swap deal physically settled swaptions or whether the contract is uploaded external swaption For IRO and Swaption style you can select the delivery type as external only In the event of a physically settled swaption you must enter a future dated interest rate swap You must specify the swaption value date and swaption maturity date in the corresponding fields The swaption value date should be the same as the maturity date of the options contract This swap is initialized when the swaption is exercised with the following details getting automatically populated e Counterparty e Booking Date The contract reference
39. the Bermudan Schedule definition screen This button is enabled only if you have mentioned the expiration style as Bermudan Bermudan Schedule Bermudan Schedule ERE UM Possible Exercise Dates ol l In this screen you can enter the allowed exercise dates for the option All exercise dates should lie between the value date and the maturity date The same date cannot be entered twice and the date for a record should be later than that for the previous record Sron An option with Bermudan schedule will be exercised automatically on maturity only if it is in the money and the maturity date has been included as a possible exercise date 5 2 2 5 Specifying Treatment of Maturity Date Falling on Holiday The holiday treatment that you specify in the Main tab of the Options Contract Input screen applies only to the maturity or the expiry date of the contract The holiday treatment for IRO schedules has to be specified in the Interest Rate Options tab All holiday treatment specifications default to the contract from the preferences that you have maintained at the product level You can change them for a contract Refer to the Products section of this manual for details of holiday treatment specifications 5 2 2 6 Specifying Limit Tracking Details You may wish to track counterparty exposure due to an option contract against limits set up for that counterparty This applies only to purchased option contracts not written one
40. to indicate that for the contracts linked to this product you can allow rate revision based on the rates uploaded from an external system 4 21 ORACLE 4 1 4 2 Specifying Rate Fixing Details Here you can capture the following details Rate Fixing Lag Days Indicate the number of days before or after the schedule maturity or schedule start date for the reference rate reset to be done Reset Date Basis Indicate whether the reference reset lag is with reference to the Period Start Date schedule begin date or the Period End Date schedule maturity date Reset Date Movement The reset lag for the reference rate can be fixed before Backward or after the period start or begin date Forward 4 1 4 3 Specifying Swaption Details Here you can capture the following details Swaption Style Indicate whether the product you are defining is meant for actual interest rate swaps or for cash settled swaps or for external swaps if this product is to be used for uploaded contracts Swap Product Specify the swap product This is applicable in case of actual interest rate swaps You will have to identify the swap product which will be used to default the details of the Derivatives contract Processing Impact While specifying the common preferences if you have selected Hedge as the Contract Type you will not be allowed to specify Collar as the IRO Type If you have chosen Advance as the Payment Method then you have to necessar
41. wherein you specify the common preferences applicable to Currency options Currency Option wherein you can specify the attributes specific to the currency options Each of the preferences has been documented in detail in the subsequent sections The common features or attributes of the product that you need to capture in this screen are as follows Deal Type Indicate whether the product caters to options wherein your bank is buying or selling options You will be allowed to change this preference for a particular option 4 3 ORACLE Contract Type Indicate whether the product is meant for Trade deals Speculation on interest rate or spot rate movement or Hedge deals Protection against risk due to interest rate or spot rate movement You will be allowed to change this preference while processing a specific deal Brokerage Allowed Enabling this preference indicates that option deals involving this product can involve brokerage 4 1 2 1 Specifying Common Details As part of specifying the common details for Interest Rate and Currency options you can specify the following details Expiration Style You can choose to specify any one of the following methods for contract expiration e European exercise possible only on maturity date e American exercise possible between any pre specified date and the maturity date e Bermudan exercise possible only on some pre specified dates before the maturity date and the maturity
42. 2 on 26 Mar 2000 then Settlement amount 50000 12 9 180 860 100 750 USD Revaluation on final Settlement will be triggered Current FV Settlement amount Last Revaluation Gain 50 USD Assumed Current Revaluation Loss 1000 Option premium 750 Settlement amount 250 USD Revaluation of Option REVL Final Settlement Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY 03 03 03 03 Amortization of inception Gain Loss AMRT Final Settlement Residual amortization of Inception Gain will be done on final settlement Total Amt to Amort 200 USD Amt already Amortized 175 USD Assumed Current Amt to Amort 200 175 25 USD Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY 03 03 8 5 ORACLE Exercise of Option EXER Final settlement Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_OPT SET REC PUR_SETL_AMT USD 26 Mar 03 MKT VAL PUR OPT PUR_SETL_AMT USD 26 Mar 03 Moving Revaluation Gain Loss to Income Expense on Final Settlement Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_OPT_ EXPENSE PUR_REVL_ LOSS USD 26 Mar 03 RV_ LOSS PUR_OPT PUR_REVL_ LOSS USD 26 Mar 03 Moving Inception Gain to Income on Final Settlement Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_IN_GAIN_OPT PUR_INCEP_GAIN USD 26 Mar 03 PUR_OPT_INCOME PUR_INCEP_GAIN USD 26 Mar 03 Exercise Settlement EXST Final settlement Exercise settlement will happ
43. Amount Tag FCY FCY Cr Amount CCY PUR_IN GAIN DEF PUR_NET_INCEP_GAIN 172 22 USD 10 Oct 00 PUR_IN GAIN OPT PUR_NET_INCEP_GAIN 172 22 USD 10 Oct 00 Moving Revaluation Gain Loss to Income Expense on Final Settlement Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date RV_GAIN_PUR_OPT PUR_REVL_GAIN USD 10 Oct 00 PUR_OPT_INCOME PUR_REVL_GAIN USD 10 Oct 00 Moving Inception Gain to Income on Final Settlement Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_IN_GAIN_OPT PUR_INCEP_GAIN USD 10 Oct 00 PUR_OPT_INCOME PUR_INCEP_GAIN USD 10 Oct 00 Expiry EXPR Now suppose the option is out of the money on the last rate fixing date Final settlement The following events and accounting entries will be processed Rate Fixing event RTFX will happen on 26 Mar 2003 Expiry EXPR event will be triggered on 31 Mar 2003 Event REVL On Expiry Revaluation on Expiry will be triggered 0 Last Revaluation Gain 50 USD Assumed Current Revaluation Loss 1000 Option premium 0 1000 USD rah Accounting Role Amount Tag FCY FCY Amount CCY RV_GAIN PUR_OPT PUR_LAST_REVL_GAIN 50 26 Mar 03 03 RV_LOSS_PUR_OPT PUR_REVL_LOSS 1000 03 MKT _VAL_PUR_OPT PUR_REVL_LOSS 1000 03 Event AMRT On Expiry Residual amortization of Inception Gain will be done Expiry Total Amt to Amort 200 USD Amt already Amortized 175 USD Assumed Current Amt to Amort 200 175 25 USD
44. Aotlealeaaieeas 5 27 5 3 4 Selecting User Defined Fields case ssscaisecasesatisaa asndansmassioreacsacqamieaiiabuacaaiedadeaassasincaassatiiad atadsarnananeashess 5 27 5 3 5 Levying Charges for Transaction ccccccccccccccccssssnneeeesessseeeeeeeeeeeeeauaaaasassssseeeeeceeeeeeesaaaaaagaassseeseeeeeeeees 5 28 5 3 6 Maintaining Settlement Instruction Details cccccccccccccccssseesccccceeecceeeeseeeeeeeeaaeeeeeceeeeaaaeseeeeseeeaaaeesees 5 30 ee Levying Tax on CONLHACl cccccccsccccccccsneeccccesaneseeeeeensseeeeeeesseeeeeaeneeeeeeaaaeeeesaaaseeeesaaaseseesaaaseeeesagaesseseas 5 31 54 MANUAL KNOCK IN KNOCK OUT wiccesesisossscxocaconteasireucticnnereeianconiiacauantvadcudnesoneqestianciweasedaunrexen cg isuneunievinds 5 32 5 5 TERMINATING OPTION CONTRACTS eesssssssseeessssssseeeesssssssteeessssserereessssseteeeessssseteeeessssseteeeessssseteeesssssetees 5 32 5 6 UPLOADING OPTIONS CONTRACTS ssseessssssssseresssssesteeessssssseeesssssetereessssseteeeessssseteeeessssssteeeessssseteeeessssetees 5 33 1 1 ORACLE 5 6 1 Uploading Options Contract for Amendment ccccccccsseccccccccece ee eeeseceeceeaaaeeeseeeeeeeaaaaseeeeesessuaaseeseeeees 5 34 Del ERC IS INGO BION ocas ia a a a E E ceeeneuetetnee 5 35 60 AUTOMATIC DAILY PROCESSING vessecetecsvecstecsccectvestveveticacsvetvcsuentusesdiystvesnezetesustecapiedeiendiesteeseetitaenieucevciet 6 1 6 1 Us 56 8 0 CTION Breeton eet enerer rer A EE EE 6 1 6 2 AUTOMATIC EVENTS EXECUTED DURING END
45. Bank 2000 Rate fixing 6M Payment Paid by Payment date LIBOR date 30 Sep 2000 50 000 000 11 0 9 0 180 National 31 Mar 2001 360 100 Bank a ae Po 30 Sep 2002 5 0 50 000 000 6 0 5 0 180 Sarah 31 Mar 2003 360 100 Williams Corridors also called Bull Spreads A corridor or a bull spread is a combination of a cap purchased at a certain strike rate and another otherwise equivalent cap written at a higher strike rate Like a collar a corridor is also a premium mitigation strategy An entity with floating rate borrowings buys a cap to protect itself against interest rates rising above the strike rate of the cap However it also feels that there is a limit to the possible rise in interest rates Therefore it is willing to sacrifice part of its gains arising from high market interest rates that is opportunity gains arising from having purchased the cap in return for a reduction in the premium that it pays for the cap It achieves this by selling a cap with a strike rate higher than that of the original cap the premium income on the sold written cap partially offsetting the premium outgo on the purchased cap The above sets of deals are bundled in a corridor Suppose Bank A buys a corridor from Bank B This means that Bank A has purchased a cap say cap 1 from Bank B and written a cap say cap 2 favoring Bank B The strike rate of cap 1 is lower than that of cap 2 The following o
46. CCY RV_GAIN PUR_OPT PUR_LAST_REVL_GAIN P 31 Aug 00 MKT_VAL_PUR_OPT PUR_LAST_REVL_GAIN 31 Aug 00 RV_LOSS_PUR_OPT PUR_REVL_LOSS 31 Aug 00 MKT_VAL_PUR_OPT PUR_REVL_LOSS 31 Aug 00 Rate Fixing RTFX and Exercise of Option EXER According to the Rate fixing Lag Reset Basis and Reset Date Movement Rate fixing event RTFX will take place on 25 Sep 2000 and settlement amount will be determined If 6M LIBOR is 11 on 25 Sep 2000 then Settlement amount 50000 11 9 180 860 100 500 USD Actual settlement for this amount will be happen on 30 Sep 2000 Accounting entries passed on event EXER Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY aal PUR_OPT_SET_REC PUR_INTR_SETL_AMT SR 25 Sep 00 PUR_OPT_INCOME PUR_INTR_SETL_AMT 500 Exercise Settlement EXST Exercise settlement will happen on the 30 Sep 2000 for the above exercise Accounting Role Amount Tag FCY Amount FCY CCY Date CUSTOMER PUR_SETL_AMT 30 Sep 00 PUR_OPT_SET_REC PUR_SETL_AMT 30 Sep 00 The event RTFX will be triggered on every rate fixing date Event EXER and EXST will be triggered depending on whether the option is in the money or not on the rate fixing date 8 4 ORACLE Final Settlement Now suppose the option is in the money on the last rate fixing date Final settlement The following events and accounting entries will be processed Rate Fixing event RTFX will be on 26 Mar 2003 If 6M LIBOR is 1
47. CON_DELTA_AC DELTA_AMT s0 GBP 02 Jun 02 Cr CON_DELTA_OFF DELTA_AMT s0 GBP 02 Jun 02 8 18 ORACLE Suppose the option gets knocked out on 01 Sep 2002 the entries passed will be as follows DLTA Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date CON DELTA OFF ANTI DELTA AMT s0 GBP 01 Sep 02 CON DELTA AC ANTI DELTA AMT s0 GBP 01 Sep 02 KNOT Only contingent reversal is shown Assuming that the rates between USD INR and GBP INR have not changed for calculation of LCY amount Any such change will be taken care of by the account revaluation batch Dr Account role code Amount tag FCY FCY LCY Cr Amount CCY AMT Dr CON_WRI_CAL_OFF WRI_CALL_AMT_EQ 1000 USD 42500 01 Sep 02 CON_WRI_CALL WRICALL_AMT 1500 GBP 42500 Sep 02 The above example is only for a Written and Call physical currency option For other Purchase Written Call Put options you can refer Annexure A for a list of accounting entries 8 1 4 Example IV Swaption with European Expiration On 01 Jan 1998 Tata Projects Ltd TPL foresees a 3 year floating rate funding requirement contingent on being awarded a tender after 9 months A forward swap contract will prove costly if the tender bid is unsuccessful Instead TPL buys a payer s swaption from National Bank with an exercise date matching the tender acceptance date 31 Aug 1998 If interest rates rise by end August TPL can raise floating rate funds in the market and simultan
48. Contract Fair Value details e Limit Tracking details The necessity for maintaining these details is explained in sections dedicated to these topics in the sections that follow Maintaining Branch Parameters You can maintain branch level parameters that govern the processing of OTC Interest Rate Currency options in a particular branch of your bank through the Options Branch Parameters screen You can invoke the Option Branch Parameter screen by typing OTDBRNPM in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Branch Parameters Options Branch Code a Process Till System Date Delta Accounting Required Next Working Day 1 UDF Details Input By Authorized By Modification Authorized Date Time Date Time Number Open In this screen you must identify the code of the branch for which you are specifying Branch Parameters Additionally you are required to indicate the manner in which events liquidation charges etc falling due on a holiday are to be processed Therefore you will need to indicate whether the batch process should process automatic events falling due on a holiday either e System Date as part of the BOD process on the first working date after the holiday e Next Working Day 1 as part of the EOD process on the working day preceding the holiday 3 1 ORACLE 3 1 2 Example Assume today is 15 November 16 November and 17 Nov
49. Cr Accounting Role Amount Tag FCY Amount FCY CCY Date CUSTOMER PUR_REBATE_AMT AUD 31 Dec 02 PUR_REBATE_REC PUR_REBATE_AMT AUD 31 Dec 02 Option not getting Knocked In Let us assume that the barrier type is Double Knock In instead of Double Knock Out If the option gets knocked in during the barrier window it can be exercised any time according to the Expiration style If it doesn t get knocked in a rebate may be payable at expiry Let us Suppose that the option doesnt get knocked in The accounting entries and the events triggered at expiry in this case are given below 8 12 ORACLE REVL at expiry TV amortized Till date 142 86 INR Total TV to amortize 500 INR Current TV to amortize 500 142 86 357 14 INR Accounting Role Amount Tag FCY Amount FCY CCY Date EXP_ON_HEDGE NET_AMORT_TV 357 14 INR 31 Dec 02 Cr PUR_TV_DEF NET_AMORT_TV 357 14 INR 31 Dec 02 KIST Knock In settlement at expiry As mentioned above a rebate amount may be payable to the buyer of the option on expiry if the option does not get knocked in during the barrier window Accounting Role Amount Tag FCY Amount FCY CCY Date CUSTOMER PUR_REBATE_AMT AUD 31 Dec 02 PUR_OPT_INCOME PUR_REBATE_AMT AUD 31 Dec 02 EXPR Expiry On Expiry the deferred intrinsic value is recognized as expense Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_HED_EXPENSE PUR_INCEP_IV 2000 INR 31 Dec 02 PUR_IV_DEF PUR_INCEP_IV 2000 INR
50. European only Auto only Schedule maturity European only Auto only Schedule maturity Swaptions American Manual only For American expiration style phates a Any day between the earliest exercise date and contract maturity date both included 5 23 ORACLE 5 3 5 3 1 IRO Type Expiration Style Exercise Settlement on Method For Bermudan expiration style On pre defined exercise dates or on contract maturity date For European expiration style Only on contract maturity date Specifying Other Details for OTC Option Contract Processing Brokerage on Contract When capturing the details of a contract that involves brokerage you will have to specify the brokerage details applicable to the contract To recall you have already specified the name of the broker through whom the contract was brokered in the Options Contract Input screen The details specified for the broker including the brokerage rule linked to the broker is defaulted However you can change some details like whether brokerage should be booked in advance or in arrears or whether it should be waived altogether Click Brokerage button to define the brokerage details that are applicable to the contract leg you are processing You will be allowed to enter details of a broker only if brokerage was allowed for the product to which the contract is associated Brokerage Details Reference Number Broker Code m Code Broker Name Description P
51. FF PREV_ANTI_ DELTA AMT Credit Contract CCY and Amount Written Put CON DELTA AC DELTA AMT Debit Contract CCY and Amount CON_DELTA_OFF DELTA AMT Credit Contract CCY and Amount CON_ANT DEL AC ANTI DELTA_AMT Credit Counter CCY and Amount CON_ANT DEL OFF ANTI DELTA AMT Debit Counter CCY and Amount a Accounting Role Amount Tag CON DELTA AC PREV DELTA AMT Credit Contract CCY and Amount CON_DELTA_OFF PREV DELTA AMT Debit Contract CCY and Amount CON ANT DEL AC PREV ANTI DELTA AMT Debit Counter CCY and Amount CON _ANT DEL OFF PREV ANTI DELTA AMT Credit Counter CCY and Amount Purchase Call CON DELTA AC DELTA AMT Debit Contract CCY and Amount CON_DELTA_OFF DELTA _AMT Credit Contract CCY and Amount CON_ANT DEL AC ANTI DELTA_AMT Credit Counter CCY and Amount CON _ANT DEL OFF ANTI DELTA AMT Debit Counter CCY and Amount CON DELTA AC PREV DELTA AMT Credit Contract CCY and Amount CON _ DELTA OFF PREV DELTA AMT Debit Contract CCY and Amount CON _ ANT DEL AC PREV ANTI DELTA AMT Debit Counter CCY and Amount CON_ANT DEL OFF PREV _ANTIL DELTA AMT Credit Counter CCY and Amount Purchase Put CON DELTA _AC DELTA AMT Debit Counter CCY and Amount CON_DELTA_OFF DELTA AMT Credit Counter CCY and Amount CON_ANT DEL AC ANTI DELTA_AMT Credit Contract CCY and Amount CON_ANT DEL OFF ANTI DELTA AMT Debit Contract CCY and Amount CON_DELTA_AC PREV DELTA AMT Credit Counter CCY and Amount
52. Hit the system triggers the Knock Out Settlement KNST event along with KNOT and the settlement is performed If the rebate is to be paid at maturity the auto settlement batch process will process the settlement with the counter party at maturity In case a rebate is applicable in the case of an option not being knocked in during the barrier window the settlement will be processed at the time of expiry maturity of the contract In this case the Knock In Settlement KIST is triggered along with Expiry of contract EXPR at the time of expiry maturity This process is executed only during the EOD run 6 4 ORACLE 6 2 5 6 2 6 Auto Settlement EXST KNST KIST PRPT As it is seen above in many cases settlement is deferred until contract maturity schedule maturity in IROs In such cases during Auto Settlement the system will process the settlement with the counter party This process is executed both during BOD and EOD and will process settlement for the following events e Rate Reset happening on a separate date from the schedule maturity date in case of an Interest Rate option Except Swaption In this case the event EXER will be triggered along with RTFX Rate fixing but settlement will happen at maturity of the schedule EXST e Acurrency option being knocked out KNOT with rebate payment on maturity The KNST event is triggered at maturity In this case the EXPR event will not be triggered e Acurrency option with a kn
53. In this screen you can define the charges for the product that you are creating ORACLE 4 24 4 1 7 To associate a charge class to a product that you are defining choose the Default From Class button A list of the classes that you have defined specifically for the OTC Interest Rate Currency options module will be displayed Choose the class or classes that you would like to associate with the product Charges for the portfolios maintained under the product will be calculated on the basis of the associated charge classes Defining Taxes for Product A tax class is a specific type of component that you can build with certain attributes You can build a tax class for instance with the attributes of a specific type of tax such as Options tax You can group several tax classes into a Tax Scheme Class You can specify the taxes for a product in the Product Tax Definition screen by associating the product with a tax scheme class you have built Please note that you cannot define a tax component specific to a product Tax Details Product Code Product Description Scheme Details Tax Scheme Scheme Description Transaction Level Tax Issuer Tax Component Tax Type Stop Association Net Consideration Borne By Cash Outflow Add Subtract SWIFT Qualifier Default Rule Rule Description Event For Association Description Event For Application alana Default Waiver Event For
54. L Though time value is said to be amortized it is a revaluation of the hedge contract in the real sense This is why the revaluation parameters Level frequency etc you have specified at the product level will be used for this Accounting entries for amortization of time value can also be defined under the revaluation event REVL Auto Exercise and Rate Reset RTFX and EXER Auto Exercise e Except for Swaptions which have to be exercised manually Auto Exercise is performed for all options e Currency options with American and Bermudan Expiration styles will be eligible for auto exercise only if they are in the money on the day of maturity e Anoption with Bermudan schedule will be exercised automatically on maturity only if it is in the money and the maturity date has been included as a possible Exercise Date Interest Rate Options Rate Reset is performed only for Interest rate options Except Swaptions depending on the rate revision schedule The rate revision schedule in turn is derived from the Reset Lag Reset Date Basis and Reset Date Movement defined for the contract The activities performed during Rate Reset are as follows e The applicable reference rate is picked up and applied for an IRO contract maturing on the day the Auto Exercise and Rate Reset batch is run e The net settlement amount for an interest rate option is calculated and stored after rate reset e The actual settlement in case of an interest rate
55. La Allow Rule Amendment Description Amend After Association Basia Amount Tag Allow Amount Amendment Description Amend After Application To associate a tax scheme class with a product that you are defining choose the Default From Class button A list of the tax scheme classes that you have defined specifically for OTC Interest Rate Currency options module will be displayed Choose the class that you would like to associate with the product Taxes for the portfolios maintained under the product will be calculated on the basis of the associated tax scheme classes 5 1 5 Processing OTC Option Instruments Introduction This section of the manual tells you how to enter details of an interest rate option IRO currency option CO or swaption transaction in Oracle FLEXCUBE This includes the definition of schedules and performing other functions in the lifecycle of a contract like re assignment amendment and reversal 5 25 ORACLE 5 2 Let us briefly look at the workflow of the OTC Options module First of all you need to maintain the basic module specific information that is necessary for the successful functioning of the module This is over and above the static data maintained as part of core services that are used by several modules in Oracle FLEXCUBE This information includes the maintenance of e Branch Parameters which govern the processing of OTC option transactions at a particular branch of your bank e Contra
56. OF DAY ccccccssssssettsssnsnnssscccceesesecssosssssnonensseceeseseeseees 6 1 6 2 1 TCV O A EN e arate Recess A iene oes EE EAE det nie EAE EOE 6 1 0 2 2 PROT LOIN A ENRE EE EA E AEE EA E NNE S A A A E IA E E 6 2 6 2 3 Auto Exercise and Rate Reset RTFX and EXER ccccccccccccccccccceeecccceeeccccueecccucecscuueecscuuecssuueecseaeesens 6 3 6 2 4 Knock In and Knock Out Event KNIN and KNOT wu ccccccccccccccssecccceecccceseccccusecccuuseseeusecscuseceeaaeesens 6 4 6 2 5 Anio Settlement EXS1 KINST KISI PICT sercon a NEN 6 5 6 2 6 PCO T TI ara a E cep os eid EO OE A NEE A ONE AE OENE EEN O 6 5 7 ANNEXURE A EVENT WISE ACCOUNTING ENTRIES AND ADVICES FOR YOUR OTC OPTIONS ia reeis scrapes a sean AE EEEE 7 1 7 1 ACOOUNTING ENTRIES ere ere reer E T nr eee ee E TE ere ere rrr errs 7 1 1 2 EEEN E a eis ute edad aisedeewatian adnesteqicuo vane eda sa ue eataonbentsdaws ta oudovanteednss ta outeomentadnvtyentes 7 1 7 3 AMONT AAG saris vaqatio ns sanarsydarassamagestanid A N atarenaeeaccaneiseaiaden 7 2 TA ACCOUNTING ROLES erates ecg ec te tases cen rarae escent E EEE A EEEE 7 5 7 5 EVENT WISE ACCOUNTING ENTRIES visivcssicdsovacsavewebouadswebentienabocddevalsnessvnberedavewauddeeabandundadiaedebabousienabsvetevedais 1 1 Td BOE ONAL BOU O seri E E EE ENS 7 7 Todt TID Trenin EQ siiis E EEE esse ick wae cee ee ps iv ok evince aad neces ieneads 7 8 Tedd REV La Revaluda omno OPUN osineen r E E 7 8 14 AMRT Amortization Of Inception Gain Loss iic
57. Over the Counter Options Oracle FLEXCUBE Universal Banking Release 11 3 0 May 2011 Oracle Part Number E51536 01 ORACLE FINANCIAL SERVICES ORACLE Over the Counter Options Table of Contents L OT Naa 1 1 1 1 ENERO CTO Ns rrgcacunicve se uantsare E puevtreeconiaveuteg tiers ate E eotiano l 1 111 Audience 0 cecccccccccccnaeeescecceeeee ne eeseeeeeeeeaeeeeeeeeeeeeGaeeeeeeeeeeeGGaseeeeeeeeesaaaeeeeeeeeeeeaaaeeseeeeeeeaaeaaassseeeeeeeauaasseeeess l 1 1 1 2 Acronyms and Abbreviations ccccccccseveccccccccssnansseeecccccaannsseeeecceaaausseeeeeceaaaasseeeeeeesuaausseseeeeesuaaaeesseeeaaas l 1 1 2 R A E E R dasetyeeedsatenadnsnmomtasmieaadnsureecen l 1 1 2 1 Related DOCUmMENIS ciris ii ain E A E vis vis Qauoe EE N EEA l 2 1 2 2 COT O T ONN e a A I E E E T E tc l 2 2 OVER THE COUNTER OPTIONS AN OVERVIEW ssssssscceccccecccoccssssscoseccccccceccccococssssssescccecececesssssssssee 2 1 Zl PRODUCTO caiene A A N A EA E AEA 2 1 Ze OTC INSTRUMENTS AND TRANSACTIONS scccscscccceeeeessscesssssssceasscccceeeeesesseessnssseeesasacceeesesesseeeesenaaes 2 1 Ae ieres kale OI GAS UROS srera E O EEEIEE EEEE 2 2 222 VOUS ATEN EEEE E I A E V coi setia oes salen E E see een A TA 2 2 225 CT VOP ONS COS areen eaaetansciosstaoetnayennsciete wasn anus toes dateaaenannecsednincten EE 2 3 Zo DEROER E S ea a asaseasyangagtoqsa A AE A E AE EENE AE AA EAS AE 2 3 Os GENERAL MAINTENANCE sE OA NEEESE 3 1 3 1 MINTER OD UC TTO e E E E E A E A
58. PT Credit WRI_OPT_EXPENSE Debit RV_LOSS_WRI_OPT Credit PUR_IN_GAIN_OPT Debit PUR_OPT_INCOME Credit WRI_IN_GAIN_OPT Debit WRI_IN_GAIN_OPT Credit PUR_OPT_EXPENSE Debit WRI_OPT_EXPENSE Debit WRI_INCEP_LOSS Credit PUR_IV_DEF Credit Accounting Role Amount Tag CUSTOMER HED TERM GAIN DEF PUR GAIN DEF HED TERM GAIN DEF If termination gain is not to be amortized then the following entries are passed for termination gain 7 5 6 EXER Exercise of Options Trigger Reval current FV Which is same as Settlement Amount for final Exercise Trigger AMRT for residual Amortization for final Exercise MKT VAL PUR OPT Credit MKT VAL WRI OPT Debit WRI _ OPT _ SET PAY Credit Second set of Entries are passed for Physically settled Swaptions For physical Currency options Reval is triggered 0 No entries are passed on Exercise Accounting Role Amount Tag Accounting Role Amount Tag Dr Cr MKT VAL PUR_IRS PUR_SWAP_AMT Debit MKT VAL _PUR_OPT PUR_SWAP_AMT Credit MKT_VAL_WRI_OPT WRI_SWAP_AMT Debit MKT_VAL_WRILIRS WRI_SWAP_AMT Credit In Case of Collars the following entries will be passed Collars are not allowed for Hedge Contracts Accounting Role Dr Cr PUR_OPT EXPENSE Debit PUR_OPT_ SET PAY Credit WAL_OPT_SET_REG Deb WRI_OPT_INCOME Credit pUR_OPT SET REC Debi PUR_OPT_INCOME Credit WRI_OPT_ EXPENSE Debit WRI_OPT_SET_PAY Credit In the case of Purchased or Written Collar if the Floor is in the money du
59. Reference Number Transaction Level Tax Issuer Tax Association E Creation ESN Application z n ceo oo a Creation ESN Component Tag Currency Tag Amount Tax Currency Tax Amount lt i Liquidation p a Component ORACLE 5 4 Manual Knock In Knock Out You can invoke the Knock In Knock Out screen by typing OTDAKIKO in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button The screen is as below Knock In Knock Out Online Knock In Knock out Details Contract Reference fF fp Counterparty Barrier Type Rebate Amount Rebate Currency Barrier Barrier Window End Date Barrier Window Start Date Lower Barrier strike Price Input By Authorized By Modification Authorized l xi Date Time Date Time Number Open The following values get displayed here e Contract reference number e Customer number CIF e Barrier Type which can be either single KI Single KO Double KI or a Double KO e Rebate Amount If a rebate was allowed for the options contract e Rebate Currency If a rebate was allowed for the options contract the applicable rebate currency e Barrier The barrier price This is the predetermined exchange rate at which the contract is knocked in or knocked out e Lower Barrier The l
60. Suppressing the generation of an advice By default all the advices defined for a product will be generated for contracts involving it If any of the advices are not applicable to contract you are processing you can suppress its generation Indicating the generation priority For a payment message by SWIFT you also have the option to change the priority with which the message should be generated By default the priority of all advices is marked as Normal You have the option to prioritize a payment message to one of the following options e Normal e Medium 5 26 ORACLE 9 3 3 5 3 4 Indicating the medium of generation The medium through which an advice is transmitted and the corresponding address will be picked up based on the address and media maintained for the customer who is the recipient of the message You can however change either of these while processing the contract Typically if changed both of them will be changed Refer to Annexure A to this manual for a list of event wise advices for the OTC Options module Viewing Event Details Click Events button from the Options Contract Input screen to view details of events involved in the transaction The details of events that have already taken place for the transaction leg will be displayed along with the date on which the event took place Event Details ENCES ES Reference Number Z oZ oo O Events i Ez SS oesonpion O DL
61. a third option That is of waiving brokerage If you opt for no booking no accounting entries will be passed for brokerage for this deal Sron If you invoke the Brokerage Details screen for operations like delete change authorize liquidate and detailed view this screen will only display brokerage details You can change brokerage details for a deal only if you have clicked the Modify option from the Actions Menu 5 25 ORACLE 5 3 2 Specifying Advices for Contract From the Contract Input details screen click Advices button The events Advices screen is displayed To recall the advices that can be generated for the events that occur during the life cycle of a contract are defined for the product to which the contract is associated Contract Reference Event Code Advice Details 158 E Pary type Receherid Suppress Priority Medium i S GO O r Language Jail The details of the advices applicable for an event are displayed in the Advices screen The party type to whom a specific advice should be sent is picked up automatically based on the type of contract you are entering and the parties involved in the contract The address of the party who is the recipient of the message will be picked up by default based on the media and address maintenance for the party You can change either of them For a payment message by SWIFT you also have the option to change the priority of the message
62. act can be different than it was the previous day During the BOD EOD process only the confirmed market fair value of the contract for revaluation will be picked up from the Contract Fair Value Maintenance screen An exception is raised if the system finds that a fair value has not been confirmed or if it is non existent Revaluation during Contract Termination During contract Termination revaluation will be triggered at Fair Value of the contract captured at the time of terminating the contract The termination gain loss will be posted according to whether the contract being terminated is a trade nedge contract and whether the bank has bought or sold written the contract 6 1 ORACLE 6 2 2 Revaluation during Contract Expiry During contract Expiry revaluation will be triggered at zero This means that if the contract expires worthless the buyer of the option will incur a revaluation loss equivalent to the option premium paid by the buyer at the time of the inception of the contract Revaluation during Contract Exercise During contract Exercise revaluation will be triggered at the Settlement Amount when the final exercise is done The settlement amount is calculated by the system For a purchased collar if the Floor is in the money in the final exercise revaluation will be triggered at zero which would essentially mean that the option buyer paying for in the money Floor will lose the option premium and the settlement amoun
63. an Expiration cccccccccccesecccccccceeeenesesecceeeecaaseseeceeeesaaaeeeseeeeeeaas 5 19 6 1 5 Examples of Different Types of Exotic Currency Options ccccccccccccsssesecccccceecaaseseeceeeeeaaaeeeeeeeeeeaas 8 21 8 2 EXPLANATION OF TERMS ASSOCIATED WITH IRO MARKETS TRANSACTIONG sseeeeeeneeeeeeeeeeeeeees 8 23 2 REPORTS s E er ee ee 9 1 9 1 E RO DUC TONG e E O AEE A EA 9 1 9 1 1 Generating C01 eee EERE ins e aa EES EN AERAN EANA SSAA 9 o PATTARRA E E aries 9 2 9 3 OPTIONS REYALUA TION REPORT ccatenccearsoaaucaaacunucayacannennoesusreeesacasndannseunte AE RA AEE 9 4 10 SCREEN GLOSSARI seep 10 1 WW TO T NDE a N E E A AEE O EEE T EREE O er Tee 10 1 1 2 ORACLE 1 1 1 2 1 About this Manual Introduction This manual is designed to help you maintain and process Over the Counter dealings in Interest Rate and Currency Options in Oracle FLEXCUBE It also assists you in handling all the necessary activities in the life cycle of an OCT instrument once it is booked This includes the generation of messages and reports the accrual and liquidation of interest components the application of charges and taxes and so on Audience This manual is intended for the Customer Service Representatives CSRs and staff in charge of setting up new products in your bank Acronyms and Abbreviations The following are some of the acronyms and abbreviations you are likely to find in the manual RO remar Organization This manual
64. aphed as follows Exchange Rate Lipton Prenn 4 11 ORACLE Delivery Type Options involved in a product can either be allowed to get into future FX deals Physical or you can opt for a net cash agreement on exercise Cash Settled or could be external through uploads If you choose Physical as the delivery type you will have to identify the Spot FX product which is to be used to upload an FX contract If you choose the Cash Settled option you will have to indicate whether the option style is any one of the following e Plain Vanilla This is a contract which provides the buyer the right but not the obligation to buy or sell the underlying currency at a predetermined rate The expiration style can be American European or Bermudan This is a standard currency option It becomes a non standard option if exercised with a barrier e Binary This is an agreement under which a fixed amount is paid by the option writer to the option holder if a specific condition is met at any time during the exercise period The payment of the fixed amount can be either at the time when the specific condition is met in case of American options or on the expiration date in case of European options e Digital This is an agreement under which a fixed amount is paid by the option writer to the option holder if a specific condition is met on the expiration date In essence this is a binary option with European expiration style e No Touch T
65. ayable Brokerage Currency as Currency asl Liquidation Booking Status No Booking Reference Number Advance Arrears C Consider for Discount 5 24 ORACLE 5 3 1 1 Features of Contract Brokerage Details Screen Here you can capture the following details Reference Number This is the reference number the contract Broker Code and Name The code assigned to the broker through whom the deal was brokered is displayed along with the broker s name Payable Currency and Brokerage Currency If the brokerage payable currency is the same as the brokerage paid currency then the same amounts brokerage paid and brokerage payable are displayed against the currencies You have the option to change these currencies Payable Amount and Brokerage Amount You cannot enter the brokerage payable amount However the brokerage paid amount can be changed The following brokerage details are displayed e The brokerage liquidation status If it has been liquidated the liquidation reference number is also displayed e The rule code and description that has been linked to the broker Indicating when brokerage should be booked Indicate preferences as to when the brokerage applicable to the contract should be linked The options available are e No Booking e Advance e Arrears The preference specified for the broker will be displayed You can change it in this screen say from advance to arrears or vice versa You have
66. ble only for hedge deals Amortisation Level Specify at which level you want the system to perform amortisation It should be performed either at the Product or at the Contract level At the product level accounting entries involving all products will be netted and a single entry will be posted for all deals involving the product Amortisation Frequency Specify the frequency of amortization The options available are Weekly Monthly Quarterly Half Yearly and Yearly Amortisation Start Weekday Start Day Start Month In case of a Weekly frequency you have to specify the day of the week on which amortization should start If the frequency is fortnightly or monthly you will have to specify the date on which the amortization should start Similarly when the frequency is Half yearly or Yearly you have to select the month of the year in which the amortization should start If you choose to amortize inception gain the same is amortized over a period from the value date of the option contract till its maturity termination irrespective of the date of payment of the premium Processing Impact The system processes contracts involving the product based on the preferences you set Accordingly the following activities are performed during processing e Amortization is done only for deferred gains Inception Gain Time Value in case of hedge deals and termination gains There will be no amortization of Inception and termination loss and
67. c 02 EXST Exercise Settlement after EXER The following accounting entries will be passed on settlement after exercise of the currency option above In this case the settlement event will be triggered along with the exercise event Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CUSTOMER PUR_SETL_AMT USD 15 Dec 02 Cr PUR_OPT_SET_REC PUR_SETL_AMT USD 15 Dec 02 8 1 3 Example Ill Contingent Entries and Delta Accountin This section is applicable only for physical currency options Let us consider the following parameters of a deal Contract Type Buy or Sell Call or Put Contract Amount Contract Currency USD Counter Currency GBP Exchange rate b n USD GBP Option premium 2500 INR June Contract Type Value Date June Premium Pay Date Jun Strike price Current Spot Rate Option Style Expiration Style Earliest Exercise Date Oct Barrier Type Barrier Lower Barrier Rebate Payment At Barrier Window Start Date Sep Barrier Window End Date November Maturity Date Description 01 2002 01 2002 50 INR USD 52 INR USD Plain Vanilla American 2002 Double Knock Out 53 INR USD 48 INR USD 100 AUD Maturity 01 2002 01 2002 31 Since the exchange rate between USD GBP on inception is 1 5 the counter currency amount Contract amount in counter currency is 1000 1 5 1500 GBP On 01 Jun 2002 the booking event will trigger with the following contingent en
68. case the movement of schedules will be based on the holidays maintained for the financial institutions involved in the contract in Financial Center field Holiday Currency and Financial Centre If you choose to follow either the currency holiday or the holiday calendar maintained for the financial center you need to specify the currencies financial institutions that are involved in the contract In the event a schedule date of a component falls due on a holiday the system computes the next schedule date based on the combination of holiday calendars maintained for all the currencies financial institutions that you have specified for the contract whether principal interest or revision Therefore in effect the next schedule date for a component will be a working day in all the calendars involved in the contract Holiday Movement Occasionally the preferred holiday treatment the branch holiday the currency holiday or the holiday governed by the financial center may in turn fall on a holiday In such a situation you have to indicate the movement of the schedule date Whether it is to be moved forward to the next working day or whether it should be moved backward to the previous working day Moving Across Months If you have chosen to move a principal schedule falling due on a holiday either forward or backward such that it falls due on a working day and it crosses over into another month the schedule date will be moved into the next month
69. cccccccccsssseccccccceeenaeseseeeeeeeeaaeeeeeeceeeeaasaesseeeeeeeesauaaeneeees 7 9 haD TERM C OnTor cate E EE E ON 7 9 7 5 6 LIR Lare Seo OG eE a E N TTA A T ee a 7 11 ATA PSST Lre e ET a a E a E A E T A E OT 7 14 7 5 8 L e T e a E E ES 7 14 7 5 9 AMDG Amortization of Deferred Gains Hedge cccccccccccsssesescccceeecnasesseeeeeeeaaaeeeeeeeeeeeusaaaseseeeeeeas 7 15 7540 KNOPF Knock Out Of Currency OPON sessin a 7 15 TAL KENST K k Out SeU CIVIL isisa ena EENE E ots ute EEE vee tus E E 7 17 J d2 KNIN a KNOCK 1107 Currency OU OM ooien E E AEE E ES 7 17 Zads Klek noek Inoel emo arier nE E E A E E TEE E EA AEA 7 17 e E E E E N E E O S A A O E VEE E A A A NE E E A T 7 18 Fodd TCI SC AMOI T AP S orii in E E E EEEE ONEROA NETE OOO EOT 7 21 TO ADVICES GENERATED oesie aai a a ON EEEN Eaa EEEE 7 28 8 ANNEXURE B EXAMPLES OF PROCESSING INTEREST RATE AND CURRENCY OPTIONS IN ORACLE assert te ccc cac cece aeneo Oa iaa aaa ana i aE Ea aaa R aaRS 8 1 8 1 MIDE ON erensia Sas alos eats sped seo ava opie RG Gate hp E EEEE ada Salen pease ane sees senses 8 1 6 1 1 Example I Interest Rate OPtions ccccccscccccccccccccsneseseccceee ea eeeeeeeeeeeeaeneeeeeeeeeeaaeeeeeeeeeeeaaaaaaeseeeeeeeeaaaaees 8 1 6 1 2 Example U BCT ONC OPN ONS scera as EEEE E EE E E E a caus cnacuse iced epee ees 5 9 6 1 3 Example III Contingent Entries and Delta Accounting cccccccccssseeeesseeceeeeeeneeeseceeceeeaaasseseeeeeeaeaas 5 16 6 1 4 Example IV Swaption with Europe
70. ccounting Role Amount Tag Dr Cr RV LOSS PUR_OPT PUR_LAST REVL_LOSS Credit MKT _VAL_WRILOPT WRI_LAST_REVL_LOSS Debit RV_LOSS_WRI_OPT WRI_LLAST_REVL_LOSS Credit EXP_ON HEDGE NET _AMORT_TV Debit PUR_TV_DEF NET _AMORT_TV Credit 7 5 4 AMRT Amortization of Inception Gain Loss Accounting Role Dr Cr PUR_IN_GAIN_DEF Debit PUR_IN_ GAIN OPT Credit WRI_IN_GAIN_DEF Debit WRI_IN_ GAIN OPT Credit 7 5 5 TERM Contract Termination Trigger Revaluation at current FV as specified while terminating Trade contracts Trigger AMRT for residual Amortization for Trade Contracts For Hedge contracts trigger Revaluation to amortize the remaining time value Accounting Role Dr Cr CUSTOMER Debi MKT VAL _PUR_OPT Credit MKT VAL_WRI_OPT Debit CUSTOMER Cre CUSTOMER Deb PUR_OPT_INCOME Credit WRI_OPT_EXPENSE Debit CUSTOMER crea PUR_OPT_EXPENSE Debit CUSTOMER crea D ORACLE Accounting Role Amount Tag Dr Cr CUSTOMER WRI _TERM_GAIN Debit WRI_OPT_INCOME WRI TERM GAIN Credit Termination Loss FV Termination Termination Value Termination Gain Termination Value FV Termination Termination Loss Termination Value Termination FV Termination Gain Termination FV Termination Value Entries for moving all Revaluation Gain Loss to Income Expense and Inception Gain to Income RV_GAIN_PUR_OPT Debit PUR_OPT_INCOME Credit RV_GAIN_WRI_OPT Debit WRI_OPT_INCOME Credit PUR_OPT_EXPENSE Debit RV_LOSS_PUR_O
71. ce Contract Reference oO Transaction Date Limit Type Interest Exposure O Input By Authorized By Modification Authorized Date Time Date Time Number re Exit Contract Reference Number The system displays the reference number of the contract Transaction Date This is the date on which the transaction is processed Current Value Current value represents the mark to market value of the contract This value will change as and when the contract is revalued Interest Exposure It indicates the exposure to fluctuation in interest rates User Reference Number The system displays the user reference number based on the contract reference number FX Exposure It indicates the exposure to fluctuations in exchange rates only when foreign currency is involved You can identify the contract for which you would like to record the Interest and FX exposures by selecting the Reference Number of the contract The Transaction Date is defaulted to the application date you will not be allowed to change it If a contract is amended and the limit line is changed in the Contract Online screen utilization will be deleted for the previous line and the latest utilization will be recorded for the new line 3 5 ORACLE 4 1 4 Defining Attributes Specific to OTC Products Introduction In this chapter we shall discuss the manner in which you can define attributes specific to an OTC Interest Rate and Currency pro
72. ces for the report Product Code Select the product code of the option product for which you wish to generate the rate fixing report From Reset Date Specify the start date for rate reset or select the same by clicking the Calendar icon provided To Reset Date Specify the end date for rate reset or select the same by clicking the Calendar icon provided Contents of the Report The report options that you selected while generating this report are printed at the beginning of the report Header The Header section of the report carries the title of the Report information on the User who generated the report the branch code the date and time and the page number of the report Body of the Report Reset Date The date on which interest rate was reset Product Code The product code of the interest rate option product Contract Ref No The contract reference number of the interest rate option contract Component The component associated with rate reset Period Start Date The start date on which the revised rate became effective 9 3 ORACLE 9 3 Period End Date The date up to which the revised rate was effective Int Ccy The currency associated with the interest component The revised rate of interest The tenor code of the reference rate The source of the reference rate Rate Type The reset lag of the reference rate whether forward or backward Options Revaluation Report The Options Revaluation Report lists the
73. ch as branch currency and customer restrictions interest details tax details etc by clicking on the appropriate icon in the horizontal array of icons in this screen For an OTC product in addition to these generic attributes you can specifically define other attributes These attributes are discussed in detail in this chapter You can define the attributes specific to an OTC product in the OTC Product Definition Main screen and the OTC Product Preferences screen In these screens you can specify the product type and set the product preferences respectively 4 1 ORACLE Product Type The product type identifies the basic nature of a product An options product that you create can either be an Interest Rate option or a Currency option You will need to specify the product preferences depending on the product type 4 1 1 1 Indicating Exchange Rate Variance For a special customer or in special cases you may want to use an exchange rate a special rate that is greater than the exchange rate maintained for a currency pair The variance is referred to as the Exchange Rate Variance When creating a product you can express an Exchange Rate Variance Limit in terms of a percentage This variance limit would apply to all contracts associated with the derivatives product The Override Limit lf the variance between the default rate and the rate input varies by a percentage that is between the Override Limit and the Rate Stop Lim
74. ct Code Description Type Description Main Currency Option Interest Rate Option Interest Rate Option Schedules Interest Rate Options _ Rate Fixing Details Interest Rate Option Type Rate Fixing Lag Days Maximum Spread Reset Date Basis Period Start Date Payment Method Period End Date Allow External Rate Reset Date Movement Forward Revision Backward Swaption Details Swaption Style Cash Settled Physical External Swap Product The preferences specific to Interest Rate options are as follows 4 1 4 1 Specifying Interest Rate Option Schedules Preferences Here you can capture the following details Interest Rate Options Type Indicate whether the Interest Rate option product is meant to cater to any one of the following types e Caps e Collars e Corridors e Floors e Swaptions Caps A cap is a series of call interest rate options with multiple exercise dates A cap gives the buyer the right to enter into strips of notional future borrowings at a pre agreed rate strike rate thus protecting him against interest rates moving above this pre agreed rate 4 14 ORACLE Example Options Bank has floating rate borrowings with details as follows Interest rate 6 Month LIBOR Rate reset dates March 31 September 30 To protect itself from an increase in interest rates the bank decides to buy an interest rate cap with the following terms The payments from the cap transaction und
75. ct Fair Value details for revaluation of options e Limit tracking details for tracking counterparty exposure due to purchased options The next step in the process is the creation of OTC option products Products help you group together or categorize contracts which share broad similarities You have to associate a product type with each of the products that you create The product inherits all the attributes of the type While defining the product you associate charge and tax classes with it specify branch and customer restrictions maintain MIS details and specify preferences for the product Under each product that you define you can enter specific contracts transactions By default a contract inherits the attributes of the product to which it is associated This means that you do not have to define the attributes that default from the product every time you enter a contract involving the product However you can change some of the attributes to suit the contract you are defining Entering Details of OTC Option Contract You can invoke the Options Contract Input screen by typing OTDCNONL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button To enter the details of a new contract select New from the Actions menu in the Application tool bar or click new icon If you are calling a contract that has already been created choose the Contract Inout Summary option The
76. cy in this case is neither USD nor INR or AUD Intrinsic Value at Inception Intrinsic value at inception is the pay off that would occur to the buyer if he were to exercise the option today Intrinsic Value Contract Amount Spot rate Strike Rate in Counter CCY In this case the payoff will be 1000 52 50 2000 INR Time Value of the deal Option premium paid Intrinsic Value 2500 2000 500 INR If the spot rate on the booking day was say 49 INR USD Lower than the strike rate then the intrinsic value of the deal will be O and the time value will be the option premium paid 8 10 BOOK Accounting Role Amount Tag FCY Amount FCY CCY Date PRPT Since option premium is paid on the booking date itself this event will trigger along with the BOOK event Accounting Role Amount Tag FCY Amount FCY CCY Date OPT_PREM_PAY PUR_OPTION_PREM 2500 INR 01 Jun 02 CUSTOMER PUR_OPTION_PREM 1000 INR 01 Jun 02 REVL Amortization of Time Value will occur on 01 Aug 2002 as per the revaluation frequency Amt to Amort Till date 500 60 7 30 142 86 INR Accounting Role Amount Tag FCY Amount FCY CCY Date EXP_ON_HEDGE NET_AMORT_TV 142 86 INR 01 Jun 02 PUR_TV_DEF NET_AMORT_TV 142 86 INR 01 Jun 02 Option Getting Knocked Out An option may get knocked out if the spot rate touches or crosses a predefined barrier between the barrier window start date and end date Event KNOT Knock Out
77. d only if the Amortize Termination Gain option has been enabled for the product else any termination gain will be treated as income on termination and will not be amortized 4 1 2 5 Specifying Liquidation Details While setting up Interest Rate option products you have to specify the liquidation parameters which include the following Numerator Method Select the method that is used to calculate the number of days between the schedule start and end dates for calculating the settlement amount from the adjoining drop down list The list displays the following values 30 EURO 30 US 30 ISDA 30 PSA Actual Actual Japanese Y Vv Y VY VY Y Denominator Method Select the method that is used to calculate the number of days in a year for the calculation of the settlement amount from the drop down list The list displays the following values gt Actual gt 365 gt 360 Denominator Basis It is used to determine whether the difference between the Strike Rate and the Reference Rate is to be taken for the whole year or for the schedule period during Settlement Amount calculation The basis can either be Per Period or Per Annum Example Contract Period 120 days 4 8 ORACLE Numerator Actual Denominator 365 Denominator Basis 3 Per Annum Liquidation will be calculated in the following manner 3 100 120 365 If the Denominator Basis was Per Period 3 100 120 120 365 4 1 2 6 Specifying Rekey Fields
78. date itself Apart from Swaptions for all other Interest Rate options expiration is allowed only on maturity date European since the settlement is always done on the Maturity Date if the option is in the money For Swaptions the expiration style can be American or Bermudan or European You will have to manually enter into an Interest Rate swap incase of a deliverable Swaption by specifying the details of the Interest Rate Swap in the DV Contract Online screen and manually exercise the Swaption by entering the settlement amount Cash settled Swaption Swap Value Physically settled Swaption The following expiration styles are allowed for Currency Options Option Style Expiration Style Plain Vanilla American Bermudan European Binary American and European Digital European No Touch European Tenor Days You will also have to indicate the periodicity of the Options deal involving the product The periodicity is indicated in terms of days and can be changed while processing a specific contract 4 4 ORACLE 4 1 2 2 Specifying Amortization Details You need to specify the following amortization details Amortisation Inception Gain Required Check this box if you want the inception gain if any to be amortized Amortisation of Termination gain Required Indicate whether you want to amortize the deferred Termination Gain if an option deal involving the product is terminated prematurely This feature is applica
79. day treatment for reset dates This requires specifications similar to the holiday treatment for maturity dates Refer to the Products section in this manual for details on specifying holiday treatment for option maturity dates 5 22 ORACLE On pressing the Schedule Explode button the exploded revision schedule is displayed Combined Holiday Treatment Combined Holiday Treatment TY Currencies or Financial Centers For non swaption IROs settlement amount is calculated and stored during rate reset Actual settlement happens on the schedule start date or schedule maturity date depending on the payment method that you have selected 5 2 5 7 External Rate Revision For IROs of the types Cap Collar Floor and Corridor you can specify whether the rate revision should be based on rates uploaded from an external system or not If you check the option Allow External Rate Revision the system will revise rates as per the uploaded rates If the box is unchecked the system will perform rate revision based on the maintenance in Oracle FLEXCUBE This value gets defaulted from the linked product However you can change it 9 2 6 Settlement Method for IROs The following table summarizes how interest rate options with different expiration styles are settled IRO Type Expiration Style Exercise Settlement on Method European only Auto only Schedule maturity European only Auto only Schedule maturity
80. deals is amortized over a period from Contract termination date 01 Sep 2002 in this case to the contract maturity date Suppose according to the frequency of amortization deferred termination gain is amortized on the 01 Nov 2002 Amount to be amortized Till date 700 2 30 6 30 233 33 INR Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_GAIN_DEF NET_GAIN_DEF 233 33 INR 01 Nov 02 PUR_OPT_INCOME NET_GAIN_DEF 233 33 INR 01 Nov 02 8 14 ORACLE If there is no other frequency of amortization between the contract termination date and contract maturity date where the deferred termination gain can be amortized the remaining part will be amortized on the contract maturity date Since the contract has already been terminated only the event AMDG will be triggered The accounting entries are Amt to amortize till date 700 INR Amt already amortized 233 33 INR Current amount to amortize 700 233 33 467 67 INR Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_GAIN_DEF NET GAIN_DEF 467 67 INR 31 Dec 02 CR PUR_OPT_INCOME NET_GAIN_DEF 467 67 INR 31 Dec 02 Contract Exercise EXER Contract Exercise will happen depending on the Expiration style In this case since it s a Plain Vanilla option with American Expiration style it can be exercised anytime between the earliest exercise date 15 Oct 2002 and contract maturity 81 Dec 2002 if it doesn t get knocked out during the barr
81. details of all the contracts that you entered earlier will be displayed in a tabular form From the Summary screen you can open an existing deal by double clicking it If you have saved an earlier contract as a template then you can invoke that from the option list next to the Template field A template can be used to capture skeletal details of an option contract for successive replications with necessary additions and changes made for each specific contract 5 2 ORACLE Over and above the template facility you also have the facility of copying the details of an existing option contract to a fresh one that you are creating Once again you can make necessary changes before saving the new contract You can invoke the Options Contract input screen by typing OTDCNONL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Options Contract Input uja of Di se Product External Reference Product Description Contract Reference Product Type User Reference Description Source Code FLEXCUBE asl Product Type Le Main Currency Options Interest Rate Options Contract Details Reversed Reference Counterparty aZ Contract Currency Z Contract Type Hedge Counter Currency Trade Booking Date Strike Price Buy or Sell Buy Value Date Contract Amount Sell Maturity Date E Broker Settlement Account Tenor
82. details of the option contracts that have been revalued periodically You can invoke this screen by typing the code OTRPRVAL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Selection options If you generate the report manually from the reports Browser you can specify preferences for the generation of the report The contents of the report are determined by the preferences that you specify Selection Criteria Product Code l Revaluation You can specify the following preferences for the report Product Code Select the product code of the option product for which you wish to generate the revaluation report 9 4 ORACLE From Date Specify the start date for report generation or select the same by clicking the Calendar icon provided To Date Specify the end date for report generation or select the same by clicking the Calendar icon provided Contents of the Report The report options that you selected while generating this report are printed at the beginning of the report Header The Header section of the report carries the title of the Report information on the User who generated the report the branch code the date and time and the page number of the report Body of the Report 9 5 ORACLE 10 Screen Glossary 10 1 Function ID List The following table lists the function id and the function description of the screens covered
83. determine how interest is going to be calculated for each liquidation cycle 5 17 ORACLE Payment Details You need to specify the following payment details Rate Denominator Basis You need to indicate the basis on which rate denominator has to be computed The options available are gt Per Annum gt Per Period Payment Method This specifies when the settlement will the happen if an option is in the money It can be gt Arrears Settlement happens at the end of the liquidation period OR gt Advance Settlement happens at the beginning of the liquidation period Discount Rate Basis If you have chosen payment method as Advance then you must specify the rate basis that is used to discount advance payments It can be gt Direct input gt Other floating component gt Contract floating component Discount Rate This is the rate to discount any advance settlement If you have specified the discount rate basis as Direct Input then you must enter a discount rate Discount Auto Pickup Check this box to indicate whether the discount rate should be automatically picked up by the system from the Floating Rates screen If you check this the system will perform this based on the other parameters you have specified such as the discount rate source rate code tenor code and the rate spread Discount Rate source If you have specified the discount rate basis as Other Floating Component then you have to mention
84. duct You can create OTC products in the OTC Product Definition screen invoked from the Application Browser In this screen you can enter basic information relating to a product such as the Product Code the Description etc You can invoke the Options Product Definition screen by typing OTDPRMNT in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Options Product Definition Product Code Exchange Rate Variancetin s Product Description Override Limit Product Type Stop Limit Description Rate Code slogan Rate Type Preferred Product Sroup Description Start Date End Date Remarks Maker Date Time Mad No Checker Date Time Record Status Authorization Status The first attribute you define for a product is its Type Once you have made this basic classification you can tailor the product to suit your requirements Therefore before you begin specifying the attributes of a product you have to indicate whether the product is an Interest Rate option product or whether it is a Currency option product Since you define products for convenience all OTC deals involving the product inherit the attributes defined for the product Yet you have room for flexibility You can change the inherited attributes of a specific option to suit your requirement at the time of processing it For any product you create in Oracle FLEXCUBE you can define generic attributes su
85. e American e Barrier None e Fixed Amount to be paid 500 e Fixed Amount Currency EUR e Earliest exercise date 01 Oct 2003 If at any time during 01 Oct 2003 and 31 Dec 2003 the spot rate touches or crosses 50 INR USD the seller of the option becomes liable to pay a fixed amount of 500 EUR to Options Bank This example also illustrates that the settlement does not have to be in the contract currency or the counter currency It can be in a pre determined currency which may be different from both oi ORACLE Example 2 We continue with the Example 1 but add on the following new parameters e Barrier type Double Knock Out e __ Barrier 52 INR USD e Lower barrier 47 INR USD e Rebate 20 EUR e Barrier Window Start Date 01 Sep 2003 e Barrier Window End Date 01 Nov 2003 If at any time during 01 Sep 2003 and 01 Nov 2003 the spot rate touches or crosses 52 INR USD or becomes less than 47 INR USD this option will cease to be in effect will be knocked out The option writer will pay a rebate of 20 EUR to Options Bank If on 15 Oct 2003 the spot rate touches the strike price the option can be exercised even though the barrier window has not yet been completed In this case the seller of the option becomes liable to pay a sum of 500 EUR to Options Bank Example 3 We continue with Example 1 but add on the following new parameters e Barrier type Single Knock In e __ Barrier 52 INR USD e Option Styl
86. e Digital e Rebate 20 EUR e Expiration Style European e Barrier Window Start Date 01 Sep 2003 e Barrier Window End Date 01 Nov 2003 If any time during 01 Sep 2003 and 01 Nov 2003 the spot rate touches or crosses 52 INR USD this option will come into effect get knocked in Now if on 31 Dec 2003 the spot rate is equal to or greater than 50 INR USD the strike price the seller of the option will pay a fixed amount of 500 EUR to Options Bank If the spot rate is below 50 INR USD on31 Dec 2003 the option expires worthless If the above option never comes into existence because of the spot rate never touching 52 INR USD between 01 Sep 2003 and 01 Nov 2003 then a rebate amount of 20 EUR will be paid to Options Bank by the seller of the option Example 4 On 01 Jun 2003 National Bank buys a call option on 10 000 USD against the INR with a strike price of 50 INR with 31 Dec 2003 as the maturity date National Bank pays a premium of 100 USD for the option Parameters of the deal e Contract Amount 10000 e Contract Currency USD e Counter Currency INR e Option premium 100 USD e Current Spot Rate 48 INR USD e Option Style No Touch e Fixed Amt to be paid 500 e Fixed Amount Currency EUR e Barrier 49 INR USD e Lower Barrier 46 INR USD e Rebate 50 AUD e Barrier Window Start Date 01 Sep 2003 e Barrier Window End Date 01 Nov 2003 8 22 ORACLE Here if at any time during 01 S
87. e created has to be specified This is defaulted from your specifications at the product level For such contracts the contract reference number of the uploaded FX product is also displayed on the screen Manual exercise of an option contract is subject to the following conditions e Manual exercise is possible for all expiration styles for all types of options except for non swaption IROs caps collars floors corridors These IROs can only have European style expiration These IROs are automatically exercised as part of end of day or beginning of day batch process if they are in the money on maturity e For digital and no touch currency options and for binary and plain vanilla currency options with European expiration style auto exercise is done on the maturity date of the contract during end of day or beginning of day batch process if the option is in the money These options can also be exercised manually but only on the maturity date e Swaptions can only be manually exercised If a swaption is not exercised manually it expires worthless on maturity In case of manual exercise revaluation at swap value is triggered In case of a cash settled swaption swap value is the settlement amount e Fora physically settled swaption the interest rate swap contract remains uninitiated until the manual exercise of the swaption is authorized e Manual exercise is permitted only if an option is in the money 5 36 ORACLE 6 Automatic
88. e specified Click on this button to enter the transaction MIS details Settlement Click this icon to invoke the Settlement screens Based on the details that you enter in the Settlement screens the contract will be settled Tax This icon invokes the Tax services Interest Click this icon to open the Interest Schedules screen Schedule 5 2 1 1 Specifying Product Code Reference Numbers and Other Details Initially you need to define the product details on this screen As you enter a valid product code the system will copy the preferences defined at the product level onto the contract Product Select an options product code from the list of options products that you have maintained or enter a valid product code For physically settled swaption deals the OT product should have a DV swap product linked to it Product Description Based on this product code the system will default the Product Description taht you have defined at the product level However you cannot modify it Type The system displays the product type The product type can be e IRO Interest Rate Option e CO Currency Option However you cannot modify it 5 4 ORACLE 9 2 2 Contract Reference Number The system generates the 16 character contract reference number based on the branch code the product code the Julian date and a running sequence of four digits You cannot change this External Reference Number You can a
89. ed Alternatively you can enter a premium percentage whereby the system computes the premium amount as a percentage of the contract amount You also need to mention the date on which the premium is due to be paid This can be any date between the booking date and the value date both inclusive 5 6 ORACLE Sior Irrespective of the date on which premium is collected the premium amount has to be entered at the time of entering the contract 5 2 2 2 Specifying Inception Details The inception fair value is the market value of the option contract at inception This is denominated in the premium currency It is possible that you have bought or sold an option at a price higher or lower than its fair value You will have to ascertain the fair value of the contract from external sources and enter the same The option contract s intrinsic value at inception is the possible pay off from the option if it were to be exercised at inception itself For a swaption this value is zero A non swaption IRO can have a positive intrinsic value at inception that does not exceed the option premium For no touch currency options intrinsic value at inception is the fixed amount that you enter at inception of the contract For binary digital and fixed payment plain vanilla options there is a positive inception intrinsic value only if the option is in the money at inception In such a case the inception intrinsic value is the fixed amount payable on exercise of the
90. ed according to the local currency of the branch and the exchange rate between the settlement currency and the local currency 8 1 1 Example Interest Rate Options To protect your bank from an increase in interest rates you have decided to buy an interest rate cap with the following terms on a trade deal 8 1 ORACLE Amortization Frequency Quarterly Amortization Month Amortization Day Revaluation Frequency Quarterly Revaluation Month Revaluation Day The accounting entries that will be passed in the system are as follows Contract Booking BOOK Dr Accounting Role Amount Tag FCY Amount FCY Cr CCY Dr MKT_VAL_PUR_OPT PUR_OPTION PREM 02 50000 USD 1000 OPT PREM PAY PUR_OPTION_PREM 1000 01 Feb Dr MKT VAL _PUR_OPT PUR_INCEP_GAIN 1200 1000 USD 01 Feb 200 PUR_IN GAIN DEF PUR_INCEP_GAIN 01 Feb Premium Payment PRPT Actual premium payment happens on 15 Feb 2000 Dr Accounting Role Amount Tag FCY FCY Amount CCY Cr OPT PREM PAY PUR OPTION PREM 1000 CUSTOMER PUR OPTION PREM 1000 Amortization of inception Gain Loss AMRT First Amortization and revaluation will be performed on 31 May 2000 Inception Gain 1200 1000 Contract FV Option Premium 200 USD This amount is to be amortized from 31 Mar 2000 to 31 Mar 2003 36 Months 30 days Amortization is performed based on the actual number of days in a year However for this example we will assume 360 days
91. ember are holidays If you check this field during the Automatic Batch Update function run only the events scheduled for 15 November will be processed The events scheduled for the holidays i e 16 November and 17 November will be processed during the Automatic Batch Update function run during beginning of day operations on 18 November Delta Accounting Required Delta is the change in the option value for every point change in the stock price As part of specifying the branch preferences you have to indicate whether delta accounting is required for the branch You will not be allowed to modify this parameter if any active physical currency options are being processed for the branch You can open the User Defined Fields screen by clicking the UDF Details button Maintaining Contract Fair Values The fair value of an option keeps fluctuating depending on the market rates As a result you need to revalue the price of each option maintained in Oracle FLEXCUBE on a daily basis Option Fair Values can be updated through the Contract Fair Value Maintenance screen You can invoke the Option Contract Fair Values screen by typing OTDCNVAL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button gt Optons Contract Fair Values Contract Reference Transaction Date e Revaluation Effective Date EI User Reference fs Delta Factor o lt l
92. en on the 31 Mar 2003 for the above exercise Accounting Role Amount Tag FCY Amount FCY CCY Date CUSTOMER PUR_SETL_AMT USD 31 Mar 03 PUR_OPT_SET_REC PUR_SETL_AMT USD 31 Mar 03 Termination TERM Now suppose the above contract is terminated on 10 Oct 2000 after the first exercise Suppose the contract is sold back to the writer of the option for 800 USD whereas the Contract Fair Value on 10 Oct 2000 was 1100 USD Contract FV on termination 1100 USD Termination Loss 1100 800 300 USD Accounting Role Amount Tag FCY Amount FCY CCY Date CUSTOMER PUR_TERM_FV 1100 USD 10 Oct 00 Cr MKT_VAL_PUR_OPT PUR_TERM_FV 1100 USD 10 Oct 00 Dr PUR_OPT_EXPENSE PUR_TERM_LOSS USD 10 Oct 00 8 6 ORACLE Accounting Role Amount Tag FCY Amount FCY CCY Date Cr CUSTOMER PUR_TERM_LOSS USD 10 Oct 00 REVL at termination Revaluation will be triggered Contract Fair Value at termination Last Revaluation Loss 300 USD As on 31 Aug 2000 Current Revaluation Gain 1100 FV at termination 1000 Option premium 100 USD Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY MKT VAL _PUR_OPT PUR_LAST REVL_ LOSS USD RV_ LOSS PUR_OPT PUR_LAST REVL_LOSS USD MKT _VAL_PUR_OPT PUR_REVL_GAIN 100 RV_GAIN_PUR_OPT PUR_REVL_GAIN AMRT at termination Inception gain to Amortize 200 USD Amt amortized till date 27 78 USD As on 31 Aug 2000 Amt to amortize on termination 200 27 78 172 22 USD Dr Accounting Role
93. ency If you want to fix the revaluation date for the last working day of the month you should specify the date as 31 and indicate the frequency If you indicate the frequency as monthly the revaluation will be done at the end of every month that is on 31st for months with 31 days on 30th for months with 30 days and on 28th or 29th as the case may be for February 4 7 ORACLE If you specify the frequency as quarterly and fix the revaluation date as 31 the revaluation will be done on the last day of the month at the end of every quarter It works in a similar fashion for half yearly and yearly revaluation frequency If you set the revaluation frequency as quarterly half yearly or yearly you have to specify the month in which the first revaluation has to begin besides the date on which the revaluation should be done Example You have selected the half yearly option and specified the start date as 31 and the start month as June The first revaluation will be done on 30 June for the period from January 1 to June 30 and the second one on 31 December for the period from 1 July to 31 December Processing Impact For Hedge deals amortization of Time Value is performed only if the Revaluation Required option has been enabled lf the Amortize Inception Gain option has not been enabled Inception Gain if any will be treated as income directly on inception of the options deal Also termination gain for hedge deals will be amortize
94. eously exercise the in the money swaption Then it will pay fixed rate interest to National Bank and receive floating rate interest from them with which it will pay back in the market If interest rates decline the swaption may be out of the money and TPL will let it expire and fund itself at the lower rate that it gets in the market Assume that TPL buys a payer s swaption from National Bank with the following terms Booking date 01 Jan 1998 Option expiration date 01 Sep 1998 Exercise date 01 Sep 1998 Option Type Right to pay fixed rate payer s swaption Premium 1 of notional principal Settlement Deliverable 8 19 ORACLE Terms of the underlying swap between TPL and National Bank Notional Principal 50 000 000 USD Effective Date 01 Sep 1998 Fixed Rate 9 5 p a payable semi annually Floating Rate 6 Month LIBOR Fixed amp Floating Payment March 1 and September 1 starting March 1 1999 and ending Dates September 1 2001 Floating Rate Reset Dates Given in the following table On 30 Aug 98 the market swap rate for a 3 year fixed to LIBOR swap with half yearly resets is 10 that is fixed rate has to be paid at 10 to receive LIBOR at six monthly intervals over the next 3 years Since the market rate is higher than the strike rate 9 5 TPL exercises the swaption Simultaneously it borrows 50 000 000 USD from the market with six monthly interest payment at LIBOR The resultant swap after exercise of t
95. ep 2003 and 01 Nov 2003 the spot rate touches or goes below 46 INR USD or touches or goes above 49 INR USD the option will be knocked out and a rebate of 50 AUD will be paid by the seller of the option to National Bank either on the knock out date or on maturity 31 Dec 2003 If the spot rate does not touch either barrier during the barrier window a fixed amount of 500 EUR will be paid by the seller of the option to National Bank on the maturity date 8 2 Explanation of Terms Associated with IRO Markets Transactions Option Buyer holder This is the party that obtains on payment of a fee the right to lend or borrow notionally a pre determined quantity of money at a specified rate of interest for a specified period starting from a specified date In effect she obtains the right to compensation in the event of a future adverse movement in a floating benchmark interest rate which can for example be the USD 6 month LIBOR Option Seller writer This is the party that enters into an obligation in return for a fee to provide compensation to the option buyer in the event of a future adverse movement in a floating benchmark interest rate Example On May 02 2003 Sarah Williams buys a Put IRO from Options Bank giving her the right to lend 1 million USD at 5 for the period July 01 2003 to December 31 2003 The benchmark rate is 6 M LIBOR On June 27 2003 when rate fixation takes place for the period July 01 December 31 2003
96. er different interest rate scenarios are as follows 6 M Payment Paid by Payment LIBOR date 31 Mar 50 000 000 10 5 9 0 Counterparty to 30 Sept 2000 180 360 o Options Bank 2000 30 Sep 50 000 000 11 9 Counterparty to 31 Mar 2000 180 360 100 Options Bank 2001 31 Mar 30 Sep 2001 2001 30 Sep 31 Mar 2001 2002 31 Mar 50 000 000 9 25 Counterparty to 30 Sep 2002 9 00 180 A 00 Options Bank 2002 30 Sep 50 000 000 9 5 9 0 Counterparty to 31 Mar 2002 180 360 100 Options Bank 2003 4 15 ORACLE Floors A floor is a series of put interest rate options with multiple exercise dates A floor gives the buyer the right to enter into strips of notional future lending at a pre agreed rate strike rate thus protecting him against interest rates moving below this pre agreed rate Example National Bank has invested in floating rate notes Investment details are as follows Interest rate 6 Month LIBOR Rate reset dates March 31 September 30 To protect itself from downward movement of the LIBOR below 8 National Bank decides to buy an interest rate floor with the following terms The payments from the floor transaction are tabulated below Rate fixing 6M Payment Paid by Payment date LIBOR date 31 Mar 2000 75 000 000 8 00 7 50 180 Counterparty 30 Sept 360 100 2000 30 Sep 2000 75 000 000 8 00 7 75 180 Counterparty 31 Mar 2001 360 100
97. erated from the options provided in the drop down list The following options are available e HTML e RTF 9 1 ORACLE 9 2 e PDF e Excel Output Select the output for the report from the options provided The following options are available e Print select this option if you wish to print the report e View select this option if you wish to view the contents of the report e Spool select this option if you wish to spool the report for further use Printer Specify the name of the printer or select it from the option list provided All the configured printers are displayed in the list This is applicable only if you have specified the output as Print The following are the reports that you can generate for the OTC module e Rate Fixing Report e Revaluation Report Rate Fixing Report The Rate Fixing Report lists the rate fixing details of interest rate options You can invoke this screen by typing the code OTRPRFIX in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Selection options If you generate the report manually from the reports Browser you can specify preferences for the generation of the report The contents of the report are determined by the preferences that you specify 9 2 ORACLE Options Rate Fixing Report Selection Criteria Product Code ae Rate Fixing From Reset Date You can specify the following preferen
98. erest Rate Options Currency Options based on the product type IRO CO any one of these tabs is displayed Here you can capture details specific to either interest rate options or currency options e Contract Details provides details of deferred inception gain revaluation deferred termination gain and deferred time value Besides the existing fields in the Options Contract Input screen you will also notice a vertical array of icons Clicking on an icon launches a screen that captures details specific to an attribute settlement message details for example These buttons are briefly described below 5 3 ORACLE Bermudan Click this icon to open the Bermudan Schedule screen Sch Click this icon to indicate brokerage details applicable to the contract Advices Click on this button to enter advices You can view suppress and prioritize the advices that are to be generated Events Click this icon to view details of the events and accounting entries that the contract involves The screen also displays the overrides that were encountered for the contract User Defined Click this icon to invoke the User Defined Fields screen You can indicate Fields the user defined fields for which information needs to be captured Charge This button invokes the Charge service of Oracle FLEXCUBE On invoking this function you will be presented with a screen where the charge rate amount and the waive charge parameters can b
99. expires Enter a valid time in the HHMM format Option Style Select the option style It can be any one of the following e Plain Vanilla e Binary e Digital e No Touch Sron If you choose Plain Vanilla the system will resolve the type of contract and generate MT305 confirmation SWIFT message during BOOK event In case of other currency option styles the system will generate MT306 confirmation SWIFT message Refer to the Products section of this manual for explanation on different styles of currency options Deal Type and Delivery Type These indicate whether the currency option is a call or a put and whether it is cash settled resulting in a net cash settlement on exercise physical resulting in a foreign exchange deal on exercise or whether the contract is uploaded external The option External will be disabled for contracts that are being created in Oracle FLEXCUBE It will be selected only in case of uploaded contracts You can select External only for uploaded contracts 5 11 ORACLE 9 2 3 1 5 2 3 2 These values are defaulted from the product under which the contract is initiated You can modify them at the contract level Deleting a currency option contract having a Physical delivery type results in the corresponding FX contract getting deleted Indicating Exotics Details Here you can capture the following details Barrier Allowed Barrier s are allowed by default for non plain vani
100. ference Number will be displayed in the User Reference Number field for that contract The User Reference Number will be the basis for checking whether the contract exists or not The upload for contract amendment will trigger the AMND event The same event is triggered even when the amendment is done in the Options Contract Input screen The fields that can be amended for an options contract are as follows e Credit Line Code e Remarks Amendments can be of two types e Financial e Non Financial For financial amendment the contract is reversed and new contract is booked based on the new values created The other values will be defaulted from the contract that is amended 5 34 ORACLE 5 7 For non financial amendment the same contract can be modified The non financial fields are e Expiry Location e Expiry Time e Remarks Exercising Option You can manually exercise specific styles of interest rate and currency options Automatic exercise of an option if the option is marked for auto exercise is handled by a system batch process if the option is in the money at maturity You can invoke the OT Contract Exercise screen by typing OTDCEXER in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Opton Contract Exercise Contract Reference sf Contract Currency Counterparty Counter Currency Exercise Details Swap Value O O Option Premium Refere
101. he swaption along with the impact of the market borrowing is diagrammatically shown as follows 9 5 National Bank Market Lender The floating rates obtaining on the various rate reset dates are as follows moms 8 20 ORACLE The fixed and floating payments over the life of the swap will be Fixed Rate Payment Paid by TPL Floating Rate Payment Paid by National USD Bank USD Mar 1 50MM 9 5 181 386000 2 388 194 44 50MM 9 8 181 36000 2 463 611 11 1999 Sep 1 50MM 9 5 184 36000 2 427 777 78 50MM 9 2 184 36000 2 351 111 11 1999 Mar 1 50MM 9 5 182 36000 2 401 388 89 50MM 9 5 182 36000 2 401 388 89 2000 Sep 1 50MM 9 5 184 36000 2 427 777 78 50MM 8 9 184 36000 2 274 444 44 2000 Mar 1 50MM 9 5 181 36000 2 388 194 44 50MM 9 7 181 36000 2 438 472 22 2001 Sep 1 50MM 9 5 184 36000 2 427 777 78 50MM 10 2 184 36000 2 606 666 60 2001 8 1 5 Examples of Different Types of Exotic Currency Options Given below are examples of the different styles of Exotic Currency options Example 1 On 01 Jun 2003 Options Bank buys a call option on 10 000 USD against INR with a strike price of 50 INR Maturity date 31 Dec 2003 Premium paid 100 USD Parameters of the deal e Contract Amount 10 000 e Contract Currency USD e Counter Currency INR e Option premium 100 USD e Strike price 50 INR USD e Current Spot Rate 48 INR USD e Option Style Binary e Expiration styl
102. his is an agreement under which a fixed amount is paid by the option writer to the option holder unless a specific condition is met on the expiration date Only European style of expiration is possible for no touch options This is similar to a knock out option as explained later Barrier Allowed A barrier is a predetermined underlying asset price at which the deal ceases to exist gets knocked out or comes into existence gets knocked in You can indicate whether a barrier can be used for knock in or knock out of an option If you enable this preference you will have to identify the barrier type The options available are e Single Knock In A deal comes into existence if a pre specified asset price is met between the start and end of the barrier window e Single knock Out A deal will cease to exist Knocked out if a pre specified asset price is met between the start and end of the barrier window A pre determined rebate amount is paid in this case e Double Knock In A deal will come into existence if any of the two pre specified underlying asset prices are met between the start and end of the barrier window e Double Knock Out A deal will cease to exist if any of the two pre specified underlying asset prices are met between the start and end of the barrier window A pre determined rebate amount is paid in this case Refer to Annexure B for examples on the various type of exotic currency options Rebate Allowed Enabling this
103. iday the schedule date is to be moved backward to the previous working day As you have indicated that the maturity can be moved across months the maturity will be automatically moved to April 30 that is the previous working day However if you have not allowed movement across months but have indicated backward movement for contract maturity the maturity date will fall on the holiday Specifying Revaluation Details Here you can capture the following details Revaluation Required You have to indicate whether a contract involving the product needs to be revalued Check this box if you need the product to be revalued Revaluation Level If you enable this preference you have to specify the level at which revaluation is to be performed At the product level revaluation entries are netted and passed for all deals involving the product Revaluation Frequency Select the frequency at which revaluation is to be performed from the adjoining drop down list The list displays the following values e Daily e Monthly e Quarterly e Half yearly e Yearly Revaluation Start Weekday Start Day Start Month Depending upon the revaluation frequency that you have set i e monthly quarterly half yearly or yearly revaluation you should specify the date on which the revaluation should be done during the month For example if you specify the date as 30 revaluation will be carried out on that day of the month depending on the frequ
104. ier window Suppose the spot rate on 15 Dec 2002 is 55INR USD Since the strike is 50 INR USD the option is in the money on this date and the buyer may exercise the option Settlement Amount 1000 Contract Amount 55 50 500 INR Accounting Role Amount Tag FCY Amount FCY CCY Date PUR_OPT_SET_REC PUR_INCEP_IV 2000 INR 15 Dec 02 PUR_IV_DEF PUR_INCEP_IV 2000 INR 15 Dec 02 Dr PUR_HED_EXPENSE HED_EXER_LOSS 1500 INR 15 Dec 02 Cr PUR_OPT_SET_REC HED_EXER_LOSS 1500 INR 15 Dec 02 It is important to note here that even though the option is in the money the amount tag populated here is HED EXER_LOSS This is so because even though the buyer of the option is getting a pay off equal to 500 INR he is in an over all loss of 1500 INR Inception IV pay off AMRT on EXER Remaining time value of the option is recognized as expense at the time of Exercise TV amortized Till date 142 86 INR As on 01 Aug 2002 Total TV to be amortized 500 INR Current TV to be amortized 500 142 86 357 14 INR 8 15 ORACLE Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr EXP_ON_HEDGE NET_AMORT_TV 357 14 INR 15 Dec 02 Cr PUR_TV_DEF NET_AMORT_TV 357 14 INR 15 Dec 02 Moving Inception TV to final Expense GL from Revaluation Expense GL on EXER after AMRT Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR_HED_EXPENSE PUR_INCEP_TV INR 15 Dec 02 Cr EXP_ON_HEDGE PUR_INCEP_TV INR 15 De
105. if the option is in the money at maturity Auto Exercise batch will run during BOD as well as EOD During BOD only those contracts will be picked up which were maturing till yesterday since rate reset date can be on the schedule maturity date For IROs For Currency options spot rate can change on the date of maturity itself and they can become in the money For a detailed list of Amount tags and accounting entries to be passed during rate reset and exercise process refer Annexure B For messaging refer Annexure C For event wise values to be populated in amount tags for exercise event refer Annexure D Knock In and Knock Out Event KNIN and KNOT The Knock in and Knock out events are applicable only for Currency Options During this event the system identifies all active and authorized currency option contracts and the processing date is between the Barrier Window Start date and Barrier Window End date as specified in the Contract Online screen The Spot rates for the current processing date will be matched against the barrier and the lower barrier If any and the contract status will be updated to Knocked In or Knocked Out as may be the case In case of a Knock Out event a rebate can be paid received to from the counter party depending on whether the options contract has been purchased or written respectively Rebate can be paid when the option gets knocked out Hit or during maturity If the rebate is to be paid at the time of
106. ily specify Backward as the Reset Date Movement and Period Start Date as the Reset Date Basis You will not be allowed to upload Derivative contracts for physically settled swaptions To save an interest rate swap you will have to invoke the Derivatives Online screen from the Contract Online screen 4 22 Cc RAC LE 4 1 5 Defining Interest Rate Option Schedules For an Interest Rate option product in addition to specifying Interest Rate preferences you will have to define the default schedules for the payment of settlement amount at maturity Click on the Interests and Rate Option Schedules tab in the Options Product Preferences screen Product Preferences Product Code Description Type Description Main Currency Option InterestRate Option Interest Rate Option Schedules Schedule Details 10f1 Uo Start Reference Frequency Unit StartWeekday Start Day Start Month Adhere To Month End aa L The Settlement Amount SETTLE_AMT which is the component for which the schedule is to be defined is displayed in this screen You will not be allowed to change it You can define the schedules for this component by capturing the following details Start Reference This can either be the Value Date or the Calendar Date If you specify Value Date as the Start Reference the settlement schedule will be calculated using the frequency and frequency units with reference to the contract value date If the start
107. in a year and 30 days in a month 8 2 ORACLE Amortized inception gain till 31 May 2000 200 2 30 36 30 11 11 USD Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY PUR_IN_GAIN_DEF PUR_NET_INCEP_GAIN 11 11 31 May 00 z PUR_IN_GAIN_OPT PUR_NET_INCEP_GAIN 11 11 31 May 00 Next Amortization will be on 31 Aug 2000 Amt to Amortize till date 200 5 30 36 30 27 78 USD Amt already Amortized 11 11 USD Current Amt to Amortize 27 78 11 11 16 77 USD Dr Accounting Role Amount Tag FCY FCY Cr Amount CCY PUR_IN_GAIN_DEF PUR_NET_INCEP_GAIN 16 77 31 Aug 00 PUR_IN_GAIN_OPT PUR_NET_INCEP_GAIN 16 77 31 Aug 00 Revaluation of Option REVL Assume that the Contract Fair Value as on 31 MAY 20000 is 1100 USD Revaluation Gain on Inception was 1200 Contract FV on Inception 1000 Option premium 200 USD Dr Accounting Role Amount Tag FCY Amount FCY Cr CCY RV_GAIN_PUR_OPT PUR_LAST_REVL_GAIN 31 May 00 MKT_VAL_PUR_OPT PUR_LAST_REVL_GAIN 31 May 00 Dr MKT_VAL_PUR_OPT PUR_REVL_GAIN 1100 1000 USD 31 May 100 00 RV_GAIN_PUR_OPT PUR _REVL GAIN 31 May 00 Next Revaluation will happen on 31 Aug 2000 Suppose the Fair Value of the contract on 31 Aug 2000 is 700 USD Last Revaluation Gain 100 USD 8 3 ORACLE Current Revaluation Loss 1000 Option Premium 700 FV on 31 Aug 2000 300 USD Dr Accounting Role Amount Tag FCY FCY Cr Amount
108. it you can save the deal involving the product by providing an override The Rate Stop Limit lf the variance between the default rate and the rate input varies by a percentage greater than or equal to the Rate Stop Limit you cannot save the deal Rate Code While settling charges for cross currency settlements you can choose to debit the customer by applying the mid rate or by using the buy sell spread over the mid rate Rate Type In addition to specifying the Rate Code you have to indicate the Rate Type which should be picked up for exchange rate conversions involving settlement of charges for cross currency deals You can maintain any one of the following as the Rate Type e Swaprate e Spot e Money e Bills e Standard For further information on the generic attributes that you can define for a product please refer the following Oracle FLEXCUBE User Manuals e Products e Settlements 4 2 ORACLE 4 1 2 Specifying OTC Product Preferences Preferences are the options available for defining the attributes of a product The instruments categorized under a product will inherit the preferences that are defined for it Click Preferences button to invoke the OTC Product Preferences screen Through this screen you can define preferences for the product you are creating Product Preferences Product Code Type Main Currency Option Deal Type Description Description Interest Rate Option Interest Rate O
109. ized Trade Deals REVL PUR _REVL_GAIN Contract Fair Value Trade Deals Option Premium 7 21 WRI REVL_GAIN Option Premium Trade Deals PUR REVL LOSS Contract Fair Value PUR_LAST REVAL GAIN Last Revaluation Gain Trade Deals WRI _LAST_REVAL_GAIN PUR_LAST_ REVAL LOSS Last Revaluation Loss Trade Deals WRI_LAST_REVAL_LOSS NET AMORT_TV TV to Amort till date Hedge Deals TV already amortized Reversal of entries and processing Charges Trade and hedge deals TERM PUR_TERM_FV Fair Value of the Hedge and Trade WL TERM FY ole ll aaa PUR_TERM_ GAIN Termination Value FV Trade Deals WRI_TERM_LOSS sane PUR _TERM LOSS FV at the time of Trade Deals WRI_LTERM_GAIN Termination value HED TERM GAIN Termination Value Hedge Deals HED _TERM_GAIN_DEF DEEPO HED TERM LOSS Inception IV Hedge Deals Termination value PUR_INCEP_IV Intrinsic Value at Hedge Deals Inception REVAL PUR _REVL_GAIN Contract Fair Value at Trade Deals ON termination User I P TERM ae Option Premium WRI REVL_GAIN Option Premium Trade Deals Contract Fair Value at termination User I P PUR LAST REVAL GAIN Last Revaluation Gain PUR REVL_ LOSS PUR_LAST REVAL LOSS Last Revaluation Loss Trade Deals WRI_LAST_REVAL_LOSS NET_AMORT_TV Inception TV TV Hedge Deals amortized till date Remaining Time Value Current Revaluation Trade Deals Gain After triggering revaluation process at termination Current Revaluation Trade Deals
110. l institution where the CO will expire Also indicate the time of expiry in HHMM format These are mandatory Select the clearing code where the CO will start Also indicate the start time in HHMM format This start time and start location which you specify here will be populated in the field 29 J of MT 306 You can also indicate the rate type Standard Cash TT etc of the reference rate that will be picked up for settlement knocking in or knocking out of a contract Physical Delivery If a currency option is marked for physical delivery while maintaining product preferences then a foreign exchange deal is automatically generated by the system on exercise of the contract The contract reference number of the uploaded foreign exchange contract is displayed on this screen Note the following For External Type currency options FX contract must be uploaded with Option Contract Reference Number You cannot upload more than one foreign exchange contract for same swaption contract if you are doing this the system will throw an error FX reference number will be displayed after uploading the FX contract Dual Currency Deposits The Linked TD account number is displayed in the TD Reference No The following operations are not allowed for Option contracts created out of TD account Amendment of Option Contracts Reversal of Option Contracts Manual Knock in Knock out is not allowed for the Contracts created out of TD accoun
111. lement on Value Date Put P N S R 100 P N S R Y 100 1 R N Y 100 cal P N R S Y 100 P N R S Y 100 1 R N Y 100 Where P notional principal which is contractually agreed N number of days in the contract period as per the contract S strike rate contractually agreed R reference rate value of the benchmark say LIBOR as on the rate fixing date Y number of days in the year this depends on day count convention In the money Out of the money and at the money An option is said to be in the money if the settlement amount is positive that is the strike rate is more favorable than the reference rate and the IRO is exercised If the reference rate is more favorable than the strike rate the IRO is not exercised and is said to be out of the money If the reference rate is exactly equal to the strike rate the IRO is said to be at the money The pay off to the option holder is the settlement amount less the upfront premium that she pays when entering into the option contract The IRO terminology mentioned above is applicable to COs as well While understanding these terms for COs you will have to read them in context 8 25 ORACLE 9 1 9 1 1 9 Reports Introduction During the day or at the end of the day you may want to retrieve information on any of the several operations that were performed during the day in your bank You can generate this info
112. lla style options For plain vanilla COs you can opt to have barrier s Barrier Type If you allow barrier s then you must select one of the following barrier types to apply to the contract e Single Knock Out SKOT e Double Knock Out DKOT e Single Knock In SKIN e Double Knock In DKIN For no touch options the barrier type can be either SKOT or DKOT Barrier and Lower Barrier If you allow barrier s you must also indicate the barrier price the pre determined exchange rate at which the contract will be knocked in or knocked out For DKIN and DKOT options this represents the upper barrier and has to be more than the strike price For SKIN and SKOT options there is only a single barrier price which can be less or more than the strike price For DKIN and DKOT options you need to indicate the lower barrier this has to be lower than the strike price Barrier Window Start Date and End Date For barrier options you also have to specify the barrier window period the period within which a system batch process compares the barrier and lower barrier if applicable with the spot exchange rate to check whether a CO contract should be knocked in or knocked out The barrier window Is specified by entering a start and an end date both dates are included in the window By default the start date is the contract value date and the end date is the contract maturity date Specifying Rebate Details Barrier options may car
113. lly e Track your exposure to counterparties e Generate or allow you to generate foreign exchange or interest rate swap deals on the exercise of physically settled currency options and swaptions respectively Subject to relevance to a specific instrument Oracle FLEXCUBE supports all the standard option expiration styles e European where the option can be exercised only on a pre specified future date e American where the option can be exercised on any date before and including a pre specified future date e Bermudan where an option can be exercised on any one of a Set of pre specified dates OTC Instruments and Transactions OTC options are traded in the over the counter market where the active participants are banks and corporates Therefore deals can be inter bank or between a bank and a corporate Deals can be struck with a view to cover an existing exposure hedge deals or to create a speculative exposure trade deals The terms of an OTC contract are tailored according to the mutual convenience of the counterparties The counterparties also carry the complete exposure on each other with no clearinghouse standing as a guarantor for the deals 2 1 ORACLE 2 2 1 2 2 2 Interest Rate Options IROs An IRO is an interest rate risk management product that is it protects the buyer from an adverse movement in interest rates A borrower of floating rate funds will be inconvenienced by a rise in interest rates
114. lso enter an external reference number which may be the reference number that your counterparty has given this will help in reconciling deal confirmations and other correspondence Source Code From the option list choose the code of the source from which you want the system to upload the contract User Reference Number The user reference number takes on the same value as the contract reference number However you can change this to suit any numbering standard that you might be following Reversed Reference Number The system displays the reference number of the contract that is being reversed and rebooked during a financial amendment Specifying Common Details Main Tab First you have to specify the basic details of the contract you are entering Customer From the list of values against the field select the CIF Number of the counterparty to the deal The name of the counterparty is automatically displayed Settlement Account Select the default settlement account branch and the default settlement account from the respective options lists next to these fields This account of the counterparty is debited or credited for all payments that you receive from or pay to the counterparty Booking Date Value Date and Maturity Date The booking date is the date when the option contract is entered into the system This is defaulted to the system date and cannot be changed For an IRO the value date is the first date of the intere
115. ly the preferred holiday treatment the branch holiday the currency holiday or the holiday governed by the financial center may in turn fall on a holiday In such a situation you have to indicate the movement of the maturity date Whether it is to be moved forward to the next working day or whether it should be moved backward to the previous working day Moving the Maturity Date across Months If you have chosen to move the Maturity Date falling due on a holiday either forward or backward such that it falls due on a working day and It crosses over into another month the maturity date will be moved into the next month only if you so indicate If not the maturity date will be kept in the same month 4 6 ORACLE 4 1 2 4 Example Scenario 1 An IRO contract you have defined happens to fall due on the 30 of April This happens to be a holiday You have indicated that in case of a holiday the maturity date is to be moved forward to the next working day As you have indicated that the maturity can be moved across months then the maturity will be automatically moved to May 1 that is the next working day in the next month However if you have not allowed movement across the month but have indicated forward movement for contract maturity the maturity date will fall on the holiday itself Scenario 2 Let us assume that the Maturity Date if the contract falls due on May 1 This happens to be a holiday You have indicated that in case of a hol
116. ments Swaptions A swaption gives the buyer an option to enter into an interest rate swap deal at a future date ata pre agreed price Payer s Swaption A payer s swaption gives the buyer of the option the right but not the obligation to pay a fixed rate and receive the floating interest rate in a swap contract A swaption gives the holder the benefit of the agreed strike rate fixed rate if the prevailing market swap rate fixed rate to be paid for receiving same benchmark floating rate is higher while giving her the flexibility to enter into the prevailing market swap rate fixed rate to be paid if it is lower than the strike rate Receiver s Swaption A receiver s swaption gives the buyer of the option the right but not the obligation to receive a fixed rate and pay the floating interest rate in a swap contract This benefits the holder if the prevailing market swap rate fixed rate to be received against the same benchmark floating rate to be paid is lower than the strike rate in this scenario the holder will exercise the swaption and enter into a swap whereby she receives the strike rate as the fixed rate If the reverse happens she will not exercise the swaption and enter into a swap at the prevailing market swap rate A swaption can be settled in either of the following ways 2 2 ORACLE Physically Settled where the counterparties are obliged to enter into an interest rate swap deal on exercise of the swaption
117. nce Rate O Premium Currency Exercise Date Strike Price Settlement Amount Settlement Currency FX Product Code kal FX Reference Input By Authorized By Contract authorized Date Time Date Time Status The settlement date is the date when you enter the application for manual exercise of the contract This is populated automatically by the system The reference rate is also automatically picked up by the system based on your specifications for the contract You can modify it This is used for calculating the settlement amount For swaption trade deals you have to enter the swap value This field is disabled for other types of options During EOTI process the system will run a validation to check whether the creation of DV contract is pending for any IRO contract with its Swaption style as External For external currency option contract the FX contract is separately uploaded with Oracle FLEXCUBE reference number While uploading the contract the validation is done between maturity date of currency option contract and value date of FX contract Key details pertaining to the option counterparty contract currency premium premium Currency counter currency and strike rate are automatically populated by the system 5 35 ORACLE A foreign exchange spot contract is created by the system on the exercise of physically settled currency options For such contracts the FX spot product under which the FX contract is to b
118. nt Entries will be triggered for the following events KNOT TERM EXPR EXER and the following entries will be passed accounting Rote Amount Tag Dru CON_WRI CALL WRI CALL AMT Counter CCY and Amount CON _ WRI CAL OFF WRI_CALL AMT EQ Debit Contract CCY and Amount p i ON_WRI_CAL_ ON_WRI_PUT WRI _PUT_AMT Credit Contract CCY and Amount ON_WRI_PUT_ C C N WRI PUT OFF WRI PUT AMT EQ Debit Counter CCY and Amount Purchase Call CON PUR CALL PUR CALL AMT Credit Contract CCY and Amount o CON PUR CAL OFF PUR _ CALL AMT EQ Counter CCY and a a S Purchase Put CON_PUR_PUT PUR PUT AMT Credit Counter CCY and Amount Pp CON PUR PUT OFF PUR PUT AMT EQ Contract CCY and Amount DLTA Delta Accounting New delta entries will be passed and previous day s entries will be reversed On KNOT TERM EXER TERM events the delta entries will be reversed and only the accounting entries with tags PREV_DELTA_AMT AND PREV_ANTIDELTA_AMT will be passed Written Call CON DELTA AC DELTA _ AMT Debit Counter CCY and Amount CON _ DELTA OFF DELTA _AMT Credit Counter CCY and Amount CON _ANT DEL AC ANTI DELTA_AMT Credit Contract CCY and Amount CON _ANT DEL OFF ANTI DELTA AMT Debit Contract CCY and Amount CON _ DELTA AC PREV DELTA AMT Credit Counter CCY and Amount CON_DELTA_OFF PREV DELTA _AMT Debit Counter CCY and Amount CON _ ANT DEL AC PREV ANTI DELTA AMT Debit Contract CCY and Amount CON_ANT DEL O
119. nterest period In the previous example July 01 2003 is the value date Maturity date This is the last day of the interest period In the previous example December 31 2003 is the maturity date Settlement date This is the date on which the settlement is effected The settlement date can either be the value date for deals settling in advance or the maturity date for deals settling in arrears Fixing date Strike date Exercise date This is the date on which the strike and reference rates both are defined later in this document are compared and the settlement amount is arrived at This is usually either the same date as the value date or a couple of days prior to the value date The above dates are depicted in the figure given below lt _ _ Interest Period Value Maturity Date ba LO Date Settlement Date Reference Underlying rate This is the rate against which the strike rate is compared to determine the payable or receivable amount Typically the reference rate is a benchmark market interest rate such as the LIBOR Strike rate Exercise rate This is the rate mentioned in the option contract against which the reference rate as on the day of exercise is compared If the reference rate is below or above the strike rate depending on whether the option is a put or a call payment is required to be made to the option buyer by the option writer An option holder strikes exercise her option
120. nual e The Central Liability User Manual e The Products User Manual Glossary of Icons This User Manual may refer to all or some of the following icons Ne Print Close Fe Lod CE Reverse T ORACLE fe paw Delete row ay Option List e7 Enter Query Fal Execute Query Refer the Procedures User Manual for further details about the icons 1 3 ORACLE 2 1 2 2 2 Over the Counter Options An Overview Introduction The OTC Options module in Oracle FLEXCUBE supports the complete lifecycle processing of the following over the counter derivative instruments e Interest Rate Options Caps Floors Collars and Corridors e Swaptions e Currency Options Plain Vanilla and Exotics You can define products for buying or selling each of the above instruments enter details of specific transactions terminate or exercise option contracts and generate a comprehensive range of reports pertaining to your transactions in OTC options You can enter into deals for hedging your existing exposures against interest rate or exchange rate fluctuations hedge deals or for speculation trade deals Based on your specifications Oracle FLEXCUBE will e Post accounting entries for various events in the life of an OTC option contract e Generate messages for various events in the life of an OTC option contract e Automatically exercise such contracts which are so marked by you e Revalue outstanding contracts periodica
121. number of the interest rate swap generated by the manual exercise of a physically settled swaption is displayed on the Options Contract Input screen If you are reversing a swaption contract manually or through an upload the corresponding DV contract also gets reversed This holds good for both the Physical and the External swaption styles You need to manually create a DV contract and choose the corresponding options contract as the swaption reference For physically settled swaption options contracts you can book IRO without a swaption reference number An underlying DV contract need not be created in this case The system allows reversal of a swaption contract only after reversing the IRS contract linked to it During manual exercise of an OT contract the system will initiate the corresponding DV contract The system will trigger DOPT event as part of this process 5 2 5 4 Specifying Schedules for Settlement and Rate Reset for IROs For caps collars floors and corridors you need to define the settlement and rate revision schedules that the tenor of the IRO is split into Click on the Interest Schedule button on the screen to visit the Interest Details sub screen If the screen for settlement schedules is not visited the schedules will be defaulted according to the parameters defined as part of product preferences Interest Schedules Component Leg Type Contract Reference Main Schedule Revision
122. o on the cap The above set of deals are bundled in a collar Suppose Bank A buys a collar from Bank B This means that Bank A has purchased a cap from Bank B and written a floor favoring Bank B The following outcomes are possible depending on various interest rate scenarios Interest rate scenario Market interest rate is more than the cap strike Bank B pays to Bank A for the difference rate between market rate and cap strike rate Market interest rate lies between the floor strike No payment is exchanged rate and the cap strike rate or is equal to either of them Market interest rate is less than the floor strike Bank A pays to Bank B for the difference rate between the floor strike rate and the market rate 4 17 ORACLE The pay off for the buyer of a collar is shown in the diagram below Pay off Strike rate of written Floor Floor Premium E ap Interest Rates Premium is Strike rate of purchased Cap Resultant Pay off Curve Example Sarah Williams a borrower in floating rate wishes to protect herself against interest rates going above 9 At the same time she sees little possibility of rates falling below 6 She buys a collar from National Bank at the following terms Booking Date 01 Feb 2000 The payments from the collar transaction are tabulated below Rate fixing 6M Payment Paid by Payment date LIBOR date 31 Mar 2000 50 000 000 10 5 9 0 180 National 30 Sept 360 100
123. o y L y O Oooo SO o y Accounting Entries You can view the accounting entries details for a specific event clicking Accounting Entries button Selecting User Defined Fields The user defined fields that have been linked to the product will be defaulted to the contract You need to capture the relevant information pertaining to these fields Click on Fields button in the Options Contract Input screen the User Defined Fields screen will be displayed along with fields for which information needs to be captured 5 27 ORACLE User Defined Fields Contract Reference Field Properties z B Field Name Field Value c sid 5 3 5 Levying Charges for Transaction For each leg of the transaction you can specify the charges that you levy Charges are applicable only the for customer legs of a transaction The characteristic feature of a charge is that it is always booked in advance and is not accrued as a charge is collected only when it is due You define the attributes of a charge by defining a Charge Rule in the ICCF Rule Definition screen A rule identifies the basic nature of the charge You also have to define a Charge Class in the Charge Class Maintenance screen where you further qualify the attributes of a rule We shall refer to these classes as components Each charge component in turn is linked to a product All the charge components linked to a product are defaulted to the con
124. ock in barrier not being Knocked in during the barrier window with rebate to be paid on maturity In this case KIST Knock in Settlement will be triggered along with EXPR on expiry e Premium payment Event PRPT happening on a date other than the contract booking date This event will reverse the entries passed by the events above and process the settlement with the customer Auto Expiry EXPR This process is executed during EOD as well as BOD and will expire the options contracts which are out of the money on their maturity dates BOD will run only till one working day before the Current Date In the case of a Swaption the option will expire on maturity date if it is has not been exercised An Interest Rate Swap is not entered into in case of a physical swaption As seen above in some cases the event EXST may be triggered along with the EXPR event Before Auto Expiry event is triggered revaluation at zero is done for the contract This means that since the contract has expired worthless It has not been exercised during its tenor the loss borne by the buyer of the contract is equal to the option premium paid In case of a written contract this would signify a profit for the writer Amortization of Deferred inception gain AMRT in case of trade deals and amortization of Deferred termination gains AMDG and Time Value REVL in case of hedge deals is also triggered before expiry of a contract In case of event AMDG being triggered e
125. on the 30 of April 31 of July and 31 of October Sron It is mandatory to visit the Schedules screen and add an empty row The system will default SETTLE_AMT as a component in that Defining Charge Components for a Product A charge class is a specific type of component that you can build with certain attributes You can build a charge class for instance with the attributes of a specific type of charge component such as Charge for Manual Exercise You can specify the different charge components for a product in the Product Charge Definition screen by associating the product with the different charge classes you have built Click Charges button to invoke the OTC Product Charges screen gt Charge Details Froduct Gode Product Description Component Details Stop Association Propagation Required LDefauitFrom Class Component Description Charge Type Third Party Type Event Details Event For Association Description Event For Liquidation Description Debit Credit Add Subtract Met Consideration SWWIET Qualifier Advice Charge Event For Application Description Basis Amount Tag Description Rule Details Settlement Currency Default Waiver Rule Capitalize Description Collect LO Advising Charges in Bills Other Details Allow Rule Amendment Amend After Application Amend After Association Consider as Discount Allow Amount Amendment Discount Basis Accrual Required
126. option The inception intrinsic value is displayed in the premium currency The option contract s time value at inception is the difference between its premium and inception intrinsic value Therefore for a swaption or a CO this will be the same as the option premium itself For an IRO it can take any positive value including zero The inception time value is expressed in the premium currency 5 2 2 3 Specifying Expiration Style The expiration style can be American European or Bermudan This specification defaults from the preferences you have maintained for the product and cannot be changed at the contract level The expiration style for IROs except swaptions can only be European and therefore this field is not enabled for such options Refer to the Products section of this manual for an explanation and applicability of the various option expiration styles For COs with American expiration style you also need to enter the earliest date before maturity when the option can be exercised This can be the value date itself or any date after that 5 7 ORACLE 5 2 2 4 Specifying Schedules for Options with Bermudan Expiration Style Bermudan style swaptions or plain vanilla COs can be exercised on certain pre specified dates during the life of the option If the expiration style for the contract that you are entering is Bermudan you have to specify the dates on which it can be exercised Click on the Bermudan Sch button to invoke
127. option is done only on the maturity date Arrears or schedule start date Advance e On rate fixing net settlement amount will be calculated and a queue will be populated with the settlement amount and the actual settlement date Auto Exercise will be done after rate fixing only if the option is in the money e If the rate fixing date is the same as the schedule maturity date settlement with the customer will also happen on the same day by triggering settlement of exercise EXST e lf the rate fixing date is different then the net settlement amount will be parked in an Asset GL For purchase options or a Liability GL For written options These entries are reversed on the schedule maturity date and the customer is debited or credited with the net settlement amount according to whether it s a buy or a sell deal ORACLE 6 2 4 Currency Options For Currency options settlement is done on the exercise day unless otherwise specified For example a rebate may be paid only at maturity for an option which has been knocked out In this case again a queue will be populated at the time of Knocking out of the option just like as in IROs and actual settlement will happen with the counter party only at maturity For European style currency options only auto exercise is possible so the exercise EXER as well as the settlement EXST will happen on the same day Contract maturity date Also again like IROs auto exercise will happen only
128. or the Previous Working Day as per your specifications in the Branch Holiday Maintenance screen e Choose to follow the Currency holiday The movement of the Maturity Date will be based on the holiday calendars maintained for the currency specified in the Holiday Currency field Holiday Currency If you have chosen the holiday treatment as Currency indicate the currency code in this field Resultantly the movement of the Maturity Date will be based on the holidays maintenance for the currency code that you identify in the Holiday Currency field Financial Center Here you can indicate that the holiday treatment needs to be governed by the Financial Center In such a case the movement of the Maturity Date will be based on the holidays maintenance for the financial institution Clearing House that you identify in the Financial Center field If you choose to follow either the currency holiday or the holiday calendar maintained for the financial center you need to specify the currencies financial institutions for deals involving the product In the event a Maturity Date falls due on a holiday the system computes the next maturity date based on the combination of holiday calendars maintained for all the currencies financial institutions that you have specified for the contract Therefore in effect the next maturity date for a contract will be a working day in all the calendars involved in the contract Holiday Movement Occasional
129. ower barrier in case of a double KI or a double KO e Barrier Window Start Date The knock in knock out processing start date e Barrier Window End Date The knock in knock out processing end date e Strike Price The strike price at which the options contract was booked The Spot Rate is captured and based on the barrier option it is validated whether Knock In or Knock Out can happen at the given spot rate 5 5 Terminating Option Contracts You can opt for premature termination of option contracts both COs and IROs which have not expired You can invoke the OT Contract Termination screen by typing OTDCTERM in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button 5 32 ORACLE 5 6 OT Contract Termination Contract Reference Contract Type Counterparty Contract Currency Termination Detail Termination Date Termination Value Option premium Contract Fair Value y Premium Currency Input By Authorized By Contract C Authorized Date Time Date Time status You can either enter the contract reference number or query for all active and authorized contracts and select from the list The contract currency name of counterparty and termination date the date on which you are entering the termination details are automatically displayed The option premium paid received at the time of inception and the currency in which it is denominated are also displa
130. ption Schedules Buy Contract Type Sell Brokerage Allowed Amortization Details Amortization Level Amortization of Inception Gain Required Amortization of Termination Gain Required Contract Product Amortization Frequency Amortization Start Weekday Amortization Start Day Amortization Start Month Revaluation Details Revaluation Level Revaluation Frequency Revaluation Start Weekday Revaluation Start Day Revaluation Required Contract Product Revaluation Start Month Common Details Expiration Style Tenor Holiday Details Holiday Treatment Holiday Currency Financial Center Holiday Movement Forward Backward Move Across Month Liquidation Details Numerator Method Denominator Method Denominator Basis Rekey Fields Rekey Required Contract Currency Counter Currency Premium Currency Option Premium Maturity Date Value Date You will notice that the preferences screen gets displayed based on the product type In case of an Interest rate Option product the screen is classified into three sections e Main wherein you specify the common preferences applicable to both IRO e Interest Rate Option wherein you can specify the attributes specific to an Interest Rate option e Interest Rate Option Schedules wherein you can define schedule for the IRO However in case of a Currency option product the screen has only two tabs Main
131. racking is required for the contract The fields Fair Value Limit Tracking Notional Limits Tracking and Risk Weighted Limits Tracking will be enabled only if Limit Tracking option is enabled If the contract is governed by a Master agreement then if any of the three fields Fair Value Limit Tracking Notional Limits Tracking and Risk Weighted Limits Tracking are checked in the Master Agreement the Limit Tracking Required option will be checked at contract level The fields Notional Limits Tracking Notional Line Code Risk Weighted Limits Tracking and Risk Weighted Line Code are defaulted from the Master agreement maintenance if the contract comes under the preview of a Master agreement The Notional Line Code and Risk Weighted Line Code are mandatory if the Notional Limits Tracking and Risk Weighted Limits Tracking options are enabled respectively For the line code all valid lines for the counterparty and the product will be displayed in the option list On saving the contract all the three lines selected will be validated for any restrictions based on product and currency Oracle FLEXCUBE will also ensure that all line codes selected are distinct from each other Risk and Risk Weighted amount will be calculated and shown on the screen as soon as the Risk Weighted Limits Tracking option is selected These fields will be recalculated if the value date or the maturity date is amended Risk Weighted Amount will be calculated as follows
132. re handled in bulk requests itself for the following e OT Knock In and Knock Out e OT Fairvalue e OT RateRevision The system will also raise an error if e Contract Reference Number is not valid e Duplicate record exists for the Contract Reference Number and Effective date combination e Effective date is lesser than the Booking Date e Effective date is greater than the application date e Delta Factor value is invalid You can run the fair value upload process any time before the OTC batch is processed during the day During the OTC batch contract revaluation will be done based on the fair value uploaded Maintaining Limit Tracking Other Exposure Details Limits tracking is done only for Purchased options Limits are always tracked at the contract level for the sum of Current Value of the option Interest exposure and exposure due to FX movement On Inception of the contract you can specify the Line the Master Agreement Code the marked to market value of the option exposure to be tracked due to interest rate fluctuation and exchange rate movemenis After the booking of the contract you can specify the various exposures through the Options Other Exposure Maintenance screen 3 4 ORACLE You can invoke the Options Other Exposures Maintenance screen by typing OTDLMVAL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button gt Options Other Exposures Maintenan
133. reference is Calendar date the settlement schedule will be calculated based on the frequency frequency units start day start weekday and start month whichever is applicable Frequency The Frequency of the schedule can either be Daily Weekly Monthly Quarterly Half Yearly or Yearly Frequency Units The number of frequency units after which a schedule should repeat For example a monthly frequency with a frequency unit of 2 is effectively a bi monthly schedule Start Weekday This is the day of the Week on which a schedule should start You will need to specify the Start Weekday only if the Frequency is Weekly You can select any day from Sunday to Saturday Start Day This is the day on which a schedule should start You can select any day of the month from the 1 to the 31 You need not indicate the Start Day if the Frequency selected is Daily or Weekly Start Month This is the month from which a schedule should start You will need to indicate the Start Month only in case of Quarterly Half yearly and Yearly frequencies 4 23 ORACLE 4 1 6 Adhere to Month End This indicates whether a schedule should adhere to month ends if the maturity date is a day less than the month end date For example a quarterly schedule starting on 31 January will have schedule maturity on 30 April 30 July and 30 October if you have failed to enable this option But if you enable this option the schedule maturity will be performed
134. requirement 7 4 ORACLE 7 4 Accounting Roles The following list contains details of the accounting Roles that are applicable to deals involving OTC options 1 5 Accounting Role MKT VAL _PUR_IRS MKT VAL_WRI_IRS PUR_OPT_SET REC WRI_OPT_SET_PAY PUR_OPT_SET_ PAY WRI_OPT_SET_ REC PUR_REBATE_REC PUR_REBATE_ PAY CON_WRI CALL CON_WRI_CAL_OFF CON_WRIL PUT CON_WRIL PUT OFF CON_PUR_CALL CON_PUR_CAL_OFF CON_PUR_PUT CON _PUR_PUT_OFF CON DELTA AC CON DELTA OFF CON ANT DEL AC CON_ANT_DEL_OFF 7 6 Role Type Expense Expense Asset Liability Liability Asset Asset Liability Contingent Contingent Contingent Contingent Contingent Contingent Contingent Contingent Contingent Contingent Contingent Contingent 7 5 Event Wise Accounting Entries In the subsequent sections we have defined suggested accounting entries for each of the events in the lifecycle of deals involving OTC products Also note that some of the Amount Tag s linked to the Accounting Roles are user defined 7 5 1 BOOK Contract Booking lf the Inception Gain is not amortized then the entries passed will be 7 7 ORACLE Accounting Role Amount Tag OPT PREM PAY PUR_INCEP_TV_DEF If the Time Value is not amortized then the entries passed will be Accounting Role Amount Tag EXP_ON_ HEDGE PUR_INCEP_TV OPT PREM _PAY PUR_INCEP_TV 7 5 2 PRPT Premium Payment 7 5 3 REVL Revaluation of Option 7 8 ORACLE A
135. ring final settlement Revaluation has to be triggered 0 Fair Value If the Cap is in the money Revaluation has to be triggered final settlement amount PUR_CAP_AMT or WRI_CAP_AMT and the following entries would be passed Accounting Role Dr Cr PUR _OPT_EXPENSE Debit PUR_OPT_ SET PAY Credit WRI_OPT_SET_ REC Debit WRIOPT_INCOME Credit Entries for moving all Revaluation Gain Loss to Income Expense and Inception Gain to Income Accounting Role Amount Tag Dr Cr RV_GAIN_ PUR_OPT PUR_REVL_GAIN Debit Accounting Role Dr Cr PUR_OPT_INCOME Credit RV_GAIN_ WRI_OPT Debit WRI_OPT_INCOME Credit PUR _OPT_ EXPENSE Debit RV_LOSS_ PUR_OPT Credit WRILOPT EXPENSE Debit RV_LOSS_WRIOPT Credit PUR_IN_ GAIN OPT Debit PUR_OPT_INCOME Credit WRI_IN_GAIN OPT Debit WRI_IN_ GAIN OPT Credit PUR _OPT_ EXPENSE Debit PUR_INCEP_LOSS Credit WRIOPT EXPENSE Debit WRIINCEP_LOSS Credit PUR_OPT SET REC Deb PUR_IV_DEF Credit Gain on Exercise is not Deferred It is taken directly to Income Accounting Role Dr Cr pUR_OPT SET REC Deb PUR_OPT_INCOME Credit PUR HED EXPENSE Debit PUR OPT SET REC HED EXER LOSS Credit MKT _VAL_PUR_IRS PUR _INCEP_IV_SWAP Debit PUR_IV_DEF PUR_INCEP_IV_SWAP Credit The following entries are to move the Inception TV to Final Expense A c from the Revaluation Expense account Accounting Role Amount Tag PUR HED EXPENSE PUR_INCEP_TV Debit EXP_ON HEDGE PUR_INCEP_TV Credit 7 5 7 EXST
136. rmation in the form of reports in Oracle FLEXCUBE For every module you can generate reports which give you data about the various events in the life of a specific contract or across contracts at a specific point in time You can have analysis reports daily reports exception reports reports on events that ought to have taken place on the contract but have not due to various reasons history reports and so on A set of report formats is pre defined for every module Generating reports From the Application Browser select the Reports option A list of all the modules to which you have access rights are displayed in the screen When you click on a module all the reports for which you have access rights under the selected module are displayed Click on the report you want to generate You will be given a selection Criteria based on which the report would be generated Once you select a report in the Application Browser the options screen related to the selected report gets displayed Here you can specify your selection options Click OK button when you have specified your preferences The Print Options screen gets displayed where you can specify the preferences for printing the report Print Options Web Page Dialog Output gt Print i View f Spool Printer Printer In this screen you can indicate the following preferences for printing the report Format Select the format in which you want the report to be gen
137. ry rebates payable to the purchaser if the option is knocked out or not knocked in during its lifetime If you have allowed rebate at the product level that specification defaults to the contract you can change it for specific contracts If rebate is allowed you have to enter the rebate amount to be paid received and the currency in which it is denominated For SKOT and DKOT options you also need to indicate whether the rebate is payable receivable at Hit when the option gets knocked out or at contract maturity 5 12 ORACLE For more details on barrier options refer to the Products section of this user manual 5 2 3 3 Fixed Payments on Exercise of Options Usually the settlement amount for plain vanilla options is based on the difference between the strike price and the spot exchange rate on the day of exercise However you may have entered into a plain vanilla options contract whose terms stipulate that a fixed amount will change hands on exercise this makes it very similar to a binary option In such a case you will first need to allow fixed payments and then indicate the amount of the fixed payment and the currency in which it is denominated For binary and digital options fixed payments are natural for either of these indicate the amount of the fixed payment and the currency in which it is denominated 5 2 3 4 Specifying Other Details for Currency Option From the list of values against the field select the financia
138. s If you have maintained a Master Agreement and wish the exposure tracking for the contract to be guided by that agreement you can select the relevant master agreement code MA Code If the master agreement stipulates limit tracking then that feature is defaulted to the contract Even if you have not selected an MA code you can choose limit tracking to apply to this contract 5 8 ORACLE 5 2 2 7 If you opt for limit tracking the Fair Value Limit tracking field will be enabled You can specify if fair value limit tracking is required for the particular contract If you chose this option then you should also specify a fair value line code against which exposure is to be tracked Once again this defaults from the master agreement if an MA code is selected and the master agreement stipulates limit tracking otherwise you can choose from the list of values next to the field Refer to the Derivatives user manual for details on maintaining master agreements For details on limit and line maintenance refer to the Central Liabilities user manual If you have opted for limit tracking you also need to specify the current value of the option contract which is the marked to market MTM value of the contract at inception You can also indicate the impact of movements in interest rates and foreign exchange rates on the exposure Specifying Notional amp Risk Weighted Limits Tracking Details Specify whether notional and risk weighted limit t
139. se Settlement Amount for Collars on Purchase options when the Floor is in the money PUR _CAP_AMT Final Exercise Settlement Amount for Collars on Purchase options when the Cap is in the money WRI FLOOR_AMT Final Exercise Settlement Amount for Collars on Written options when the Floor is in the money PUR _CAP_AMT Final Exercise Settlement Amount for Collars on Written options when the Cap is in the money PUR_SWAP_AMT Swap Value of Physically Settlement Swaption 7 3 ORACLE PUR _REBATE_AMT Rebate received for a purchased currency option if the option is knocked out or not knock in WRI REBATE_AMT Rebate paid for a written currency option if the option is knocked out or not knock in NET GAIN DEF Net Amortized Deferred Gain WRI_CALL_ AMT Notional Principal for Written Call option PUR _CALL_ AMT Notional Principal for Purchased Call Option WRI_CALL_ AMT EQ Notional Principal offset for Written Call Option PUR CALL AMT EQ Notional Prin offset for Purchased Call Option WRI_PUT AMT EQ Notional Principal offset for Written Put Option PUR PUT AMT Notional Principal for Purchased Put Option PUR PUT AMT EQ Notional Principal offset for Purchased put Option PREV DELTA_AMT Previous Delta Amount PREV _ANTIDELTA_AMT Previous Anti Delta Amount DELTA_AMT Delta Amount ANTILDELTA_AMT Anti Delta Amount WRI_PUT_AMT Notional Principal for Written Put Option In addition to these you can define any number of amount tags as per your
140. st period For a CO it is the date from which the option takes effect This can be earlier than the booking date provided that the first exercise date for an IRO is always later than or same as the booking date The value date for an option contract has to be earlier than its maturity date The maturity date for both IROs and COs is the date on which the contract expires It is mandatory to enter the maturity date However if you specify the tenor the maturity date will be computed accordingly and displayed The reverse is also true If expiration style is European in an MT306 then maturity date field 30a will be updated with option F 5 5 ORACLE 9 2 2 1 Contract Currency Select the currency of the option contract from the option list next to the field For IROs your choice of the contract currency is subject to the currency restrictions that you have maintained as part of product definition Counter Currency The counter currency applies only to COs where this is the other currency of the pair that makes up the contract Your choice of counter currency is restricted by currency pair restrictions that you have maintained at the product level Strike Price Indicate the price at which a CO will be exercised depending on the option style This applies for all styles of COs except for No Touch options This does not apply for IROs Contract Amount The contract amount is the size of the option deal For COs this should
141. t Option Premium OoOo Premium Currency Counter Currency Inception Fair Value O O Contract Currency Confirmation C Confirmed Input By Authorized By Modification Authorized exit Date Time Date Time Number Open You can capture the following data in this screen Contract Reference Number To indicate the revaluation price you should first select the reference number of the contract which requires revaluation Select the appropriate reference number the adjoining option list Reval Effective Date In this field specify the date on which the contract fair value becomes effective for revaluating the deal 3 2 ORACLE Delta Factor Delta is the change in the option value for every point change in the stock price You have to specify the delta factor used for the contract only if you have enabled the Delta Accounting Required option at the branch parameter level Fair Value lt indicates the value of the contract at inception Transaction Date Specify the date of transaction The system defaults it to the branch date However you can modify it User Reference Number Based on the contract reference number specified the system displays the user reference number However you cannot change it Counterparty Specify the CIF number of the counterparty to the deal Select the appropriate value from the adjacent option list Based on the CIF number the system displays the name of the corresponding
142. t Termination of Option Contract is not allowed for the Contracts created out of TD account Contracts created out of TD account are not allowed for exercising the contract For more details on Dual Currency Deposit refer section Capturing Details for Dual Currency Deposit in the chapter Maintaining Customer Accounts in Core Entities User Manual ve ORACLE 5 2 4 Settlement Method for Currency Options The following table summarizes how currency options with different option and expiration styles are settled Option Expiration Style Exercise Settlement on Style Method Plain American Manual or For American expiration style Vanilla Bermudan or Auto E If manually exercised Any day between uropean l i earliest exercise date and Contract maturity date both included if manually exercised For auto exercise On maturity if the option is in the money For Bermudan expiration style If manually exercised On pre defined exercise dates or on contract maturity date For auto exercise On maturity if the option is in the money For European expiration style Only on Contract maturity date In all these cases payment can be a fixed amount if such is opted for Binary American or Manual or For American expiration style european ai If manually exercised Any day between earliest exercise date and Contract maturity date both included if manually exercised For auto exercise On maturity if the
143. t Paid by Payment date LIBOR date 31 Mar 2000 10 5 50 000 000 9 0 6 0 180 Options 30 Sept 360 100 Bank 2000 30 Sep 2000 11 0 50 000 000 9 0 6 0 180 Options 31 Mar 2001 360 100 Bank 31 Mar 2001 50 000 000 9 0 6 0 180 Options 30 Sep 2001 360 100 Bank 30 Sep 2001 50 000 000 8 0 6 0 180 Options 31 Mar 2002 360 100 Bank Swaptions A swaption is an option on a swap It gives the buyer on payment of an advance fee the right but not the obligation to enter into an interest rate swap at a specified future date at a particular fixed rate and for a specified term Refer to the Derivatives manual for details on Interest Rate Swaps IRS The terms of a swaption that the buyer and the seller agree on are e The strike rate e The length of the swaption period which usually ends on the starting date of the swap if the swaption is exercised e The notional amount for the underlying swap e The frequency of settlement under the underlying swap e Other terms of the underlying swap Maximum Spread Indicates the maximum spread over and above the Reference Rate You can specify the spread in terms of a percentage Payment Method The payment method can either be in Advance or in Arrears If you select Advance payment will have to be made at the beginning of a schedule If you select Arrears settlement will be done at the maturity of a schedule Allow External Rate Revision Check this box
144. t Reference Main Schedule Revision Revision Holiday Treatment Holiday Treatment v Holiday Movement Forward C Move Across Month Currency az Backward C Cascade Schedules Financial Centre nal Reset Date Details Revision Date Basis v Holiday Treatment Reset Days Currency C Ta C Allow External Rate Financial Centre az Revision Reset Date Movement Forward Backward Revision Schedules E j a Start Date Frequency Frequency Units No of Schedules Adhere To Month End ol s O Schedule Honday Schedule Revision Revision day In this tab you need to specify 5 2 5 5 Revision Holiday Treatment Here you can capture the following details Holiday Treatment In Oracle FLEXCUBE a schedule date falling due on a holiday can be treated in any of the following ways e Ignore the holiday In which case the holiday will be ignored and the schedule date will be retained on that day 5 20 ORACLE e Choose to follow the Local holiday The holiday will be treated as per your specifications in the Branch Holiday Maintenance screen e Choose to follow the Currency holiday The movement of schedules will be based on the holiday calendars maintained for all the currencies that you have specified for the contract in Holiday Currency field e Indicate that the holiday treatment should be governed by the Financial Center In such a
145. t during the final exercise along with an income or a loss as may be the case in intermediate settlements For a Collar with in the money Cap Revaluation is triggered at settlement amount In case of a currency option being knocked out revaluation will be triggered at zero What happens during Final Exercise e Revaluation will be done at the contract level even though the revaluation level may be marked as Product in the product Preferences screen e Premature termination knock out or expiry of the contract final revaluation gain loss will be recognized as income expense and posted to the respective GLs Revaluation event will not be triggered if the fair value of the option has not changed since the last revaluation was done Amortization Amortization of a contract is performed as per the amortization parameters specified for the product If you have indicated that amortization should be at the product level all the entries for a product are netted based on a common currency and buy sell indicator The system performs amortization for the following amounts e Deferred Inception Gains e Deferred Termination Gains Hedge deals only e Time Value of Option Premium Only for Hedge deals Amortization of Deferred Inception Gains AMRT Inception gain is amortized over the period from the contract value date till the contract maturity date termination date if the contract is terminated prematurely even though the premium may
146. t is yet to be liquidated Charge liquidation When a charge component that is applied to a transaction is liquidated the relevant accounting entries are passed The Contract Charge screen displays e The charge components that have already been liquidated e The amount that was liquidated e The currency in which it was liquidated Maintaining Settlement Instruction Details In order to capture the details of a contract successfully you have to capture the following details as well e The accounts to be debited for charges if there are any e The accounts to be debited for interest that the contract involves e he method in which the contract is to be settled whether it is an instrument or a Message as in a SWIFT or TELEX message e Details about the route through which the money settlement should take place The information that is related to the settlement method and route applicable for a transfer is referred to as Settlement Instructions Refer to the Settlements user manual for details on maintaining settlement instructions 5 30 ORACLE 5 3 7 Levying Tax on Contract The tax details specified for the product to which the contract is associated will be automatically applied to the contract However while processing a contract you can waive the application of tax on the contract You can invoke the contract Tax Details screen by clicking Tax button from the Contract on line screen Tax Details
147. these will be recognized as Expense as and when they are incurred e Amortization of Time Value in case of hedge deals is based on the Revaluation parameters level frequency etc since it is actually the revaluation of the contract e The following fields will not be defaulted to the contracts involving the product gt Amortize Inception Gain gt Amortize termination gain gt Revaluation required 4 5 ORACLE Moreover you will not be allowed to modify your preferences for these options if a contract involving the product are still active e If aday which is not present in a month has been selected as the Amortization Start Day or Termination Start Day the Start Day will be taken as the last day of the current month For instance if you have selected 31 as the Amortization Start Day with the frequency as Monthly and the processing month is February the processing will be done on the 28 of the month Else it will be done on the 29 if it is a leap year 4 1 2 3 Specifying Holiday Details Here you can capture the following holiday details Holiday Treatment Specify the holiday treatment In Oracle FLEXCUBE a Maturity Date falling due on a holiday can be treated in any of the following ways e Ignore the holiday In which case the holiday will be ignored and the Maturity Date will be retained as per the frequency e Choose to follow the Local holiday The contract Maturity Date will be defaulted on the Next Working Day
148. thorized Date Time Date Time Status Swaption Maturity Date Interest Rate Option Type Select the IRO type from the adjoining drop down list The list displays the following values e Cap e Floor e Collar e Corridor e Swaption The type is defaulted to the contract from the product under which it is initiated and cannot be changed at the contract level The payment method can be Advance or Arrears indicating whether settlement takes place at the beginning or end of each schedule This is also defaulted from the product and cannot be changed at the contract level 5 2 5 1 Specifying Rate Details For the IRO contract that you are defining you have to enter the following rates whichever applicable Cap Strike Rate For a cap you have to enter the strike rate For a collar which is a combination of a purchased cap and a written floor you must enter the cap buy rate 5 15 ORACLE Floor Strike Rate Enter the strike rate for a floor or the floor strike rate for a collar Corridor Purchase and Sell Cap Rates For a corridor which is a combination of a purchased cap and a written cap enter the strike rates for the two caps The written cap should have a higher strike rate than the purchased one 5 2 5 2 Specifying Reference Rate Details Here you can capture the following details Spread You have to indicate the spread in percentage that is to be applied over the reference rate A positive
149. tized till date Option Premium Inception Fair Value Inception Fair Value Option Premium Total Amt to Amort Amt Amortized till Date This will be option premium on expiry Remaining Inception Remaining termination gains Hedge deals Only This is separate from EXPR Either EXPR or AMDG will trigger on maturity Following is a list of messages generated for different events in the lifecycle of an OTC Option contract Unformatted Message Contract Confirmation BOOK Initiation of Contract AMND Amendment Modification Confirmation TERM Termination Termination Confirmation MT360 M1364 MT 306 7 28 MT306 MT306 a MT360 MT 305 for Plain Vanilla COs MT 305 for Plain Vanilla COs MT 305 for Plain Vanilla COs Unformatted Swift IRO Message RTFX Rate Fixing MT362 Rate Fixing Advice Applicable EXER MT 362 sent on rate applicable reset suffices for IROs Exercise REVR Cancellation MT362 MT306 MT 305 for Plain Confirmation Vanilla COs KNIN Knock In N A MT306 MT 305 for Plain Confirmation Vanilla COs KNOT Knock Out N A MT306 MT 305 for Plain Confirmation Vanilla COs 8 Annexure B Examples of Processing Interest Rate and Currency Options in Oracle FLEXCUBE 8 1 Introduction The examples given in this annexure explain the life cycle processing for Interest Rate and Currency options Local currency entries have not been shown and will be pass
150. tlement Amt for Collars if Floor is in the money for final exercise PUR_CAP_AMT Calculated Settlement Amt for Collars if Cap is in the money for final exercise PUR_SWAP_AMT Swap Value UseR I P This is the settlement Amount for cash settled swaptions WRI_CAP_ AMT HED EXER_GAIN Payoff System Calculated Inception IV REVAL PUR_REVL_GAIN Settlement Amt eae WRI REVL_ LOSS ela open EXER WRI_REVL_GAIN PUR REVL_ LOSS Option Premium Settlement Amt Calculated 7 24 Intermediate Exercise for Collars Trade deals Intermediate Exercise for Collars Trade deals Final Exercise for Collars Trade deals Final Exercise for Collars Trade deals On initiation of underlying swap or cash settlement Swaptions PUR_INCEP_IV Intrinsic Value at Hedge Deals Only Inception except collars Hedge Deals Only except collars HED EXER LOSS Inception IV Payoff Hedge Deals Only System Calculated except collars PUR_INCEP_IV_SWAP Inception IV Hedge Deals Swaptions Only Final Exercise except Collars with Floor in the money Trade deals Only Final Exercise except Collars with Floor in the money Trade deals Only PUR_REVL_GAIN WRI_REVL_LOSS REVAL ON EXER AMORT ON EXER EXST PUR_SETL_AMT WRI_REVL_GAIN PUR REVL_LOSS PUR_LAST_REVAL_GAIN WRI_LAST_REVAL_GAIN PUR_LAST_REVAL_LOSS WRI_LAST_REVAL_LOSS NET AMORT_TV Hedge Deals PUR _REVL GAIN WRI_REVL_ GAIN
151. tracts associated with it Thus each time you enter a contract you need not specify when and how charges should be collected However while capturing the details of a transaction you can choose to associate a component to the transaction Further you can modify some of the attributes defined for the applicable component From the Options Contract Input detail screen click on the Charge button The Contract Charge Details screen is displayed 5 28 ORACLE Charge Detail Contract Reference Association Application Liquidation Association CO E A A a a The reference number of the transaction for which you are defining charge details is displayed The screen contains a list of all the charge components applicable to the transaction Associating a charge component to a transaction All the charge components applicable to the transaction you are processing will be displayed together with the rule that is linked to the component In this section of the screen you can e Change the charge rule linked to the component e Disassociate a charge component from the transaction Changing the charge rule linked to a component The rule that is linked to a charge component is displayed next to the component To link a new rule to the component click the option list from the field titled Rule A list of all the charge rules maintained will be displayed Select the appropriate rule from the pick list The new rule
152. tries Since the other entries have already been explained we will not be explaining those entries again Suppose the LCY is INR Let us assume the rate between USD INR is 40 and GBP INR 30 The LCY amount for contract currency amount 1000 40 40000 8 17 ORACLE LCY amount for Counter Currency amount 1500 30 45000 Average LCY amount 40000 45000 2 42500 BOOK Dr Cr Accounting Role Amount Tag FCY FCY LCY Amount CCY AMT Dr CON WRI CALL WRI_CALL_ AMT 1500 GBP 42500 01 Jun 02 Cr CON _WRICAL_OFF WRI _CALL_AMT_EQ 1000 USD 42500 Jun 02 Suppose the delta factor maintained for 01 Jun 2002 is 0 8 The delta amount will be calculated as follows Counter Currency Amount delta factor 1500 0 8 1200 GBP At the end of the day when the batch process is run the delta accounting entries will be posted as follows DLTA Accounting Role Amount Tag FCY Amount FCY CCY Date CON_DELTA_AC DELTA AMT 1200 GBP 01 Jun 02 CON_DELTA_OFF DELTA _AMT 1200 GBP 01 Jun 02 Now on 2 of June when the batch process is run the previous days delta entries will be reversed Suppose the delta factor maintained for 01 Jun 2002 is 0 6 The delta amount will be calculated as follows Counter Currency Amount delta factor 1500 0 6 900 GBP DLTA Accounting Role Amount Tag FCY Amount FCY CCY Date CON_DELTA_OFF ANTI_DELTA_AMT 1200 GBP 02 Jun 02 CON_DELTA_AC ANTI_DELTA_AMT 1200 GBP 02 Jun 02 Dr
153. utcomes are possible depending on various interest rate scenarios Interest rate scenario Market interest rate is equal to or more Bank B pays Bank A for the difference between the than the strike rate of cap 2 strike rates of cap 1 and cap 2 Market interest rate lies between the Bank B pays Bank A for the difference between strike rates of cap 1 and cap 2 market interest rate and cap 1 strike rate Market interest rate is equal to or less No payment is exchanged than the strike rate of cap 1 The pay off for the buyer of a corridor is shown in the following figure 4 19 ORACLE strike Rate of 4 written cap strike Rate of purchased cap _p Interest Rates Resultant Pay off Example Norah Jones a borrower in floating rate wishes to protect herself against interest rates going above 6 At the same time she sees little possibility of rates going above 9 So she decides to have protection in the 6 9 band by buying a corridor from Options Bank at the following terms Booking Date 1 Feb 2000 Value Date 31 Mar 2000 Maturity Date 31 Mar 2003 Interest Payment Dates March 31 and September 30 Interest rate 6 Month LIBOR Rate fixing dates March 31 and September 30 Strike Rate of purchased cap 6 Strike Rate of sold cap 9 Notional Principal 50 000 000 USD Option Premium 0 5 of Principal 4 20 ORACLE The payments from the corridor transaction are tabulated below Rate fixing 6M Paymen
154. will be made applicable to the charge component Disassociating a charge component from the transaction You can disassociate a charge component from the transaction In the Association section of the Contract Charge screen click against the waive option positioned next to the component In this case the charge component is attached to the transaction but is not calculated Indicating the charge components to be applied to a transaction In the application section of the screen you can indicate the charge components that should be applied to the transaction The list of components that is displayed depends on the charge components that you have associated to the transaction The following details of the component are also displayed e The basis component on which the charge is levied e The currency of the basis amount e The basis amount 5 29 ORACLE 9 3 6 e The charge amount e The currency in which the charge amount is defined You can change the charge amount that is calculated using the class applicable to the component Waiving a charge on a transaction You also have the option to waive the component for the transaction that you are processing If for some reason you want to waive the charge on the transaction you are processing you can do so by checking against the waiver option in the application section of the screen The charge will be calculated but not applied Sior Note that you can waive a charge only if i
155. with which they are associated
156. xpiry event EXPR will not be triggered since the option has already being terminated and only the deferred termination gains are being amortized All the revaluation gains losses and inception gains are posted to Income or Expense GLs 6 5 ORACLE T 7 1 7 2 Annexure A Event wise Accounting Entries and Advices for your OTC Options Accounting Entries This section contains details of the suggested accounting entries that can be maintained while setting up a Interest Rate and Currency Option products for the OTC module of Oracle FLEXCUBE The details of the suggested accounting entries are listed event wise OTC Events The following is an exhaustive list of events that can take place during the lifecycle of an OTC deal In the subsequent paragraphs we shall examine the accounting entries for each of the events listed below a ORACLE 7 3 Amount Tags The Amount Tags listed below are provided in Oracle FLEXCUBE 7 2 ORACLE PUR_INTR_FLR_AMT Intermediate Exercise Settlement Amount for Collars on Purchased options when Floor is in the money WRI_INTR_FLR_AMT Intermediate Exercise Settlement Amount for Collars on Written options when Floor is in the money PUR_INTR_CAP_AMT Intermediate Exercise Settlement Amount for Collars on Purchased options when the Cap is in the money WRI_INTR_CAP_AMT Intermediate Exercise Settlement Amount for Collars on Written options when the Cap is in the money PUR _FLOOR_AMT Final Exerci
157. yed Enter the termination value the amount at which you are selling buying back the option to from the counterparty This has to be a positive value You will also have to enter a positive market fair value for the contract at the time of termination if left blank the system picks up the latest revaluation fair value For hedge deals if you have chosen to amortize termination gain loss at the product level then the same is amortized from the date of termination till the contract maturity date Otherwise the termination gain loss is recognized as income loss immediately on termination Termination gain loss for trade deals cannot be amortized You can delete a saved termination application before it is authorized Uploading Options Contracts You can also upload the options contract details from an external system into Oracle FLEXCUBE You can also upload the Derivatives contracts for external swaption in case of IROs and FX contracts in case of Currency options into Oracle FLEXCUBE Oracle FLEXCUBE can then establish the requisite soft links between the uploaded IRO contracts and the uploaded Derivatives contracts Similarly it can establish a link between the uploaded FX contracts and uploaded Currency options contracts 5 33 ORACLE 5 6 1 Note the following e IROs with swaption style Physical cannot be uploaded e Currency options with delivery type as Physical cannot be uploaded The system

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