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Over the Counter Options User Manual

1. Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr MKT_VAL_PUR_OPT PUR_LAST_REVL_LOSS 300 USD 10 Oct 00 Cr RV_LOSS_PUR_OPT PUR_LAST_REVL_LOSS 300 USD 10 Oct 00 Dr MKT VAL PUR OPT PUR REVL GAIN 100 USD 10 Oct 00 Cr RV GAIN PUR OPT PUR REVL GAIN 100 USD 10 Oct 00 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 2172 22 USD Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr PUR_IN_GAIN_DEF PUR_NET_INCEP_GAIN 172 22 USD 10 Oct 00 Cr 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 Dr RV_GAIN_PUR_OPT PUR_REVL_GAIN 100 USD 10 Oct 00 Cr PUR_OPT_INCOME PUR_REVL_GAIN 100 USD 10 Oct 00 8 7 ORACLE Moving Inception Gain to Income on Final Settlement Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR IN GAIN OPT PUR INCEP GAIN 200 USD 10 Oct 00 Cr PUR_OPT_INCOME PUR_INCEP_GAIN 200 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
2. Accounting Role Description Role Type WRI INCOME Income on Written Options Income PUR OPT EXPENSE Expense on Purchased Options Expense WRI OPT EXPENSE Expense on Written Options Expense PUR GAIN DEF Deferred Gains on Purchased Options Asset PUR HED EXPENSE Expense on Hedge Options Expense VAL PUR IRS Market Value of purchased Interest Rate Swap Expense VAL IRS Market Value of WRITTEN Interest Rate Swap Expense PUR OPT SET REC Payout amount receivable on Purchased Options Asset WRI OPT SET PAY Payout amount Payable on Written Options Liability PUR OPT SET PAY Payout amount Payable on Purchased Options Liability WRI OPT SET REC Payout amount receivable on Written Options Asset PUR REBATE REC Rebate amount receivable on Purchased Options Asset PUR REBATE PAY Rebate amount payable on Written Options Liability CON WRI CALL Notional Principal for written Call options Contingent CON WRI CAL OFF Offset for Notional Principal for written Call options Contingent CON WRI PUT Notional Principal for written Put options Contingent CON WRI PUT OFF Offset for Notional Principal for Written Put options Contingent CON PUR CALL Notional Principal for purchased Call options Contingent CON PUR CAL OFF Offset for Notional Principal for purchased Call options Contingent CON PUR PUT Notional Principal for purchased Put options Contingent CON PUR PUT OFF Offset for Notiona
3. Dr Account role code Amount tag FCY Amount FCY Date Cr cc Y Dr PUR_IV_DEF PUR INCEP IV 60 EU 01 Jun 12 R Cr OPT PREM PAY PUR INCEP IV 60 EU 01 Jun 12 R Dr PUR_TV_DEF PUR_INCEP_TV 10 EU 01 Jun 12 R Cr OPT PREM PAY PUR INCEP TV 10 EU 01 Jun 12 R Dr CON PUR CALL CON PUR CALL 300 EU 01 Jun 12 R Cr CON PUR CALL OFF CON PUR CALL 300 EU 01 Jun 12 R Event PRPT Since option premium is paid on the booking date itself this event will trigger along with the BOOK event Dr Account role code Amount tag FCY Amount FCY Date Cr CC Y Dr OPT PREM PAY PUR OPTION PRE 70 EU 03 Jun M R 12 Cr CUSTOMER PUR OPTION PRE 70 EU 03 Jun M R 12 Event REVL Amortization of Time Value will occur on 01 Aug 2012 as per the revaluation frequency Amt to Amort Till date 10 60 7 30 2 85 EUR Dr Account role code Amount tag FCY Amount FCY Date Cr Y Dr EXP ON HEDGE NET AMORT TV 2 85 EU 01 Jun R 12 8 18 ORACLE Cr PUR TV DEF NET AMORT TV 2 85 EU 01 Jun 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 Now suppose on 10 Sep 2012 the spot rate touches or crosses 3 3 EUR The option will be Knocked Out and a pre specified rebate of 9 EUR will be
4. Rate fixing 6M Payment Paid by Payment date LIBOR date 360 100 30 Sep 2002 7 5 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 outgo on the cap The above set of deals are bundled in a collar Suppose
5. E Period Start Date Period End Date Computation Start Date Computation End Date Flat Amount Compounding Indicator E Revision Schedules End Date Rate Code Rate source Tenor Code SWIFT Indicator Reset Date Auto Pickup o The Revision tab is used for the payment of settlement amount at maturity 5 24 ORACLE Interest Schedules Component Contract Reference Main Schedule Revision Revision Holiday Treatment Holiday Treatment Holiday Movement Forward Move Across Month Backward Cascade Schedules Currency Financial Centre Reset Date Details Revision Date Basis v Holiday Treatment LH a Reset Days Currency Allow External Rate Financial Centre L Revision Reset Date Movement Forward Backward Revision Schedules HEE E Start Date Frequency Frequency Units No of Schedules Adhere To Month End IEA Schedule Holiday Revision Holiday In this tab you need to specify 5 2 7 1 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 holid
6. Accounting Role Amount Tag Dr Cr PUR_OPT_SET_PAY PUR_FLOOR_AMT Credit WRI_OPT_SET_REC WRI_FLOOR_AMT Debit WRI_OPT_INCOME WRI_FLOOR_AMT Credit Accounting Role Amount Tag Dr Cr RV GAIN PUR OPT PUR REVL GAIN Debit PUR OPT INCOME PUR REVL GAIN Credit RV GAIN WRI WRI GAIN Debit WRI OPT INCOME WRI REVL GAIN Credit PUR EXPENSE PUR REVL LOSS Debit RV LOSS PUR OPT PUR REVL LOSS Credit WRI OPT EXPENSE WRI REVL LOSS Debit RV LOSS WRI WRI REVL LOSS Credit PUR IN GAIN OPT PUR INCEP GAIN Debit PUR OPT INCOME PUR INCEP GAIN Credit WRI IN GAIN OPT WRI INCEP GAIN Debit WRI IN GAIN OPT WRI INCEP GAIN Credit PUR OPT EXPENSE PUR INCEP LOSS Debit PUR INCEP LOSS PUR INCEP LOSS Credit WRI OPT EXPENSE WRI INCEP LOSS Debit WRI INCEP LOSS WRI INCEP LOSS Credit PUR SET REC PUR INCEP IV Debit PUR IV DEF PUR INCEP IV Credit Gain on Exercise is not D eferred It is taken directly to Income Accounting Role Amount Tag Dr Cr PUR OPT SET REC HED EXER GAIN Debit Entries for moving all Revaluation Gain Loss to Income Expense and Inception Gain to Income ORACLE Accounting Role Amount Tag Dr Cr PUR_OPT_INCOME HED_EXER_GAIN Credit PUR HED EXPENSE HED EXER LOSS Debit PUR OPT SET REC HED EXER LOS
7. Deliver Receive will default from the securities deal product preference If its blank at securities deal product this will default as Free e Limits will be tracked for these Securities deals where line is selected during manual exercise Over ride If you have not selected the With SE deal check box system will not trigger SE deal In this scenario on saving system display the following override message System will not generate underlying Securities deal 4 2 3 Option Styles The system supports the option types 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 option It becomes a non standard option if exercised with a barrier 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 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 No Touch This is an a
8. Look back Floating 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 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 applicable only for hedge deals 4 5 ORACLE 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 yea
9. 000000000000 6 25 6 1 5 Example V Swaption with European Expiration eese nennen eene 6 28 6 1 6 Examples of Different Types of Exotic Currency Options eese ene 6 30 1 2 ORACLE 8 2 EXPLANATION OF TERMS ASSOCIATED WITH IRO MARKETS TRANSACTIONS eene 8 31 9 REPORTS 9 1 9 1 INTRODUCTION ola cova BEER Ue edes udev Pietre ede ere veo ee eee PEE Ee EE Den 9 1 9 1 1 Generatitig 9 1 9 2 RATE FIXING REPORT eese vente ce 9 2 9 3 OPTIONS REVALUATION detecte tene ee d cie Peer cet ERE ERE 9 4 10 SCREEN GLOSSARY p 10 1 10 1 BUNGCTION DD 10 1 1 3 ORACLE 1 About this Manual 1 14 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 1 1 1 Audience This
10. Trade Date UNDERLYING Underlying In addition to these you can define any number of amount tags as per your requirement Accounting Roles The following list contains details of the accounting Roles that are applicable to deals involving OTC options Accounting Role Description Role Type CUSTOMER Counterparty X type OPT_PREM_PAY Option Premium Payable Liability PREM REC Option Premium Receivable Asset MKT VAL PUR OPT Market Value of Purchased Option Asset MKT VAL WRI OPT Market Value of Written Option Liability PUR INCEP LOSS Inception Loss on Purchased Options Expense WRI INCEP LOSS Inception Loss on Written Options Expense PUR IN GAIN DEF Deferred Inception Gain on Written Options Asset WRI IN GAIN DEF Deferred Inception Gain on Written Options Asset PUR IV DEF Deferred Intrinsic Value Asset PUR TV DEF Deferred Time Value Asset RV GAIN PUR Revaluation Gain on Purchased Option Income RV LOSS PUR OPT Revaluation Loss on Purchased Option Expense RV GAIN WHRI Revaluation Gain on Written Option Income RV LOSS WRI OPT Revaluation Loss on Written Option Expense EXP ON HEDGE Expense on Hedge Options Expense PUR IN GAIN OPT Inception Gains on Purchased Options Income WRI IN GAIN OPT Inception Gains on Written Options Income PUR OPT INCOME Income on Purchased Options Income 49 ORACLE
11. 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 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 stayi
12. Hedge deals Only This is separate from EXPR Either EXPR or AMDG will trigger on maturity 7 6 Advices Generated Following is a list of messages generated for different events in the lifecycle of an OTC Option contract Event Unformatted Swift IRO Swift Remarks Message BOOK Contract MT360 MT306 MT 305 for Plain 22 22 Confirmation Vanilla COs Initiation of Contract AMND Modification MT360 MT306 MT 305 for Plain Confirmation Vanilla COs Amendment TERM Termination MT364 MT 306 MT 305 for Plain TN Confirmation Vanilla COs Termination RTFX Rate Fixing MT362 Not Advice Applicable 7 32 ORACLE Event Unformatted Swift IRO Swift Remarks Message Rate Fixing EXER Not 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 7 33 ORACLE 8 1 8 1 1 8 Annexure B Examples of Processing Interest Rate and Currency Options in Oracle FLEXCUBE 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 passed according to the local currency of the branch and the exchange rate between t
13. e The basis component on which the charge is levied e currency of the basis amount 5 33 ORACLE 5 3 6 e The basis amount 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 Note that you can waive a charge only if it 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 The method in which the contract is to be settled whether it is an instrument or a Message as in a SWIFT or TELEX messag
14. strike rate length of the swaption period which usually ends on the starting date of the swap if the swaption is exercised e notional amount for the underlying swap 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 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 23 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
15. 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 Date Cr Amount CCY AMT Dr CON_WRI_CAL_OFF WRI_CALL_AMT_EQ 1000 USD 42500 01 Sep 02 Cr CON_WRI_CALL WRI_CALL_AMT 1500 GBP 42500 01 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 Example V 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 simultaneously 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 marke
16. Track Pre Settlement Risk Track Pre Settlement Risk Limit Limit Maker DateTime Contract Status Checker Authorized DateTime The settlement date is the date when you enter the application for manual exercise of the contract This is populated automatically by the system 5 39 ORACLE 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 For below mentioned options styles exercise is allowed only on the maturity date e Plain vanilla with European Style Binary e Digital e Notouch e Asset or Nothing e Asian e Look back Fixed e Look back Floating The following fields are not applicable for Securities Option e Swap Value e Counter Currency e FX Product Code e FX Reference Reference rate for Plain Vanilla If closing price is available as on that day will be defaulted here otherwise user has to mention the reference rate to compute profit or loss You can override this price Reference rate in the case of Asian Options Average price of an option contract gets defaulted here System computes the Asian Price Average price of every day closing price of underlying from the value date till exercise date For this average price system considers number of decimals a
17. 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 22 ORACLE The payments from the corridor transaction are tabulated below Rate fixing 6M Payment 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 9 0 50 000 000 9 0 6 0 180 Options 30 Sep 2001 360 100 Bank 30 Sep 2001 8 0 50 000 000 8 0 6 0 180 Options 31 Mar 2002 360 100 Bank 31 Mar 2002 6 0 0 30 Sep 2002 30 Sep 2002 5 0 0 31 Mar 2003 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
18. Cr EXP_ON_HEDGE PUR_INCEP_TV 500 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 Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CUSTOMER PUR_REBATE_AMT 300 AUD 31 Dec 02 Cr PUR_REBATE_REC PUR_REBATE_AMT 300 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 doesn t 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 Total TV to amortize 500 INR 142 86 INR Current TV to amortize 500 142 86 357 14 INR Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr 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 wi
19. 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 Settlement on Value Date Put P N S Ry Y 100 P N S RY Y 100 1 R N Y 100 Call 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 IRO terminology mentioned above is applicable to COs as well While understanding these terms for COs you will have to read them in context The pay off to the option holder is the settlement amount less the upfront premium that she pays when entering into the option contract 8 34 ORACLE 9 1 9 Reports Introduction Du
20. REVL GAIN Gain deals only ON EXER Recognition of total After uiggeng gn revaluation process at revaluation Income Exercise PUR REVL LOSS Current Revaluation Final Exercise Only WRI REVL LOSS Loss Trade deals only After triggering Recognition of total revaluation process at revaluation Expense Exercise PUR_INCEP_TV Time Value at Inception Hedge Deals Only except collars AFTER PUR_INCEP_GAIN Option Premium Trade deals Only AMORT Inception Fair Value ON EXER WRI_INCEP_LOSS Recognition of Inception Gain Loss PUR_INCEP_LOSS Inception Fair Value Trade deals Only WRI INCEP GAIN Option Premium Recognition of Loss Gain EXST PUR SETL AMT Settlement amount Both Hedge and Trade Calculated at EXER event for purchased options deals WRI SETL AMT Settlement amount Calculated at EXER Trade deals only 7 29 ORACLE Event Amount Tag Value Remarks event for Written Options PUR FLOOR AMT Settlement amount Calculated at EXER event for Collars if Floor is in the money Trade deals only PUR CAP AMT Settlement amount Calculated at EXER event for Collars if Cap is in the money Trade deals only KNIN Will be followed by KIST if Rebate is to be paid on Maturity Both for trade and Hedge KIST PUR REBATE AMT Rebate amount User Both for trade and at Inception Hedge This event will WAL REBATE ANT be trigge
21. e Counterparty e Booking Date 5 17 ORACLE The contract reference 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 6 Specifying Security Option You can input options deal based on single security or Index Click Security Options to maintain the security options Options Contract Input Product External Reference Product Description Contract Reference Product Type Description Number Product Type User Reference P Source FLEXCUBE Reversed Reference Main Securities Option Currency Options Interest Rate Options Contract Details Deal Product Opt
22. As on 01 Aug 2002 Total TV to be amortized 500 INR Current TV to be amortized 500 142 86 357 14 INR Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr EXP ON HEDGE NET AMORT TV 357 14 INR 01 Sep 02 Cr 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 Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR HED EXPENSE PUR INCEP TV 500 INR 01 Sep 02 Cr EXP_ON_HEDGE PUR_INCEP_TV 500 INR 01 Sep 02 AMDG after termination Deferred termination gain in case of hedge 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 Dr PUR_GAIN_DEF NET_GAIN_DEF 233 33 INR 01 Nov 02 CR 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 termi
23. Cr Amount CCY Dr RV_GAIN_PUR_OPT PUR_LAST_REVL_GAIN 50 USD 26 Mar 03 Cr MKT_VAL_PUR_OPT PUR_LAST_REVL_GAIN 50 USD 26 Mar 03 Dr RV_LOSS_PUR_OPT PUR_REVL_LOSS 250 USD 26 Mar 03 Cr MKT_VAL_PUR_OPT PUR_REVL_LOSS 250 USD 26 Mar 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 Date Cr Amount CCY Dr PUR_IN_GAIN_DEF PUR_NET_INCEP_GAIN 25 USD 26 Mar 03 Cr PUR_IN_GAIN_OPT PUR_NET_INCEP_GAIN 25 USD 26 Mar 03 Exercise of Option EXER Final settlement Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date 8 5 ORACLE Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR OPT SET REC PUR SETL AMT 750 USD 26 Mar 03 Cr MKT VAL PUR OPT PUR SETL AMT 750 USD 26 Mar 03 Moving Revaluation Gain Loss to Income Expense on Final Settlement Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR OPT EXPENSE PUR REVL LOSS 250 USD 26 Mar 03 Cr RV LOSS PUR OPT PUR REVL LOSS 250 USD 26 Mar 03 Moving Inception Gain to Income on Final Settlement Dr Cr
24. Put CON PUR PUT PUR PUT AMT Debit Counter CCY and Amount CON PUR PUT OFF PUR PUT AMT EQ Credit Contract CCY and Amount Reversal of contingent Entries will be triggered for the following events KNOT TERM EXPR EXER and the following entries will be passed Accounting Role Amount Tag Dr Cr CCY Written CON WHRI CALL WRI CALL AMT Credit Counter CCY and Amount CON WHRI CAL OFF WRI CALL AMT Debit Contract CCY and Amount Written Put CON WHRI PUT WRI PUT AMT Credit Contract CCY and Amount CON WRI PUT OFF WRI PUT AMT Debit Counter CCY and Amount Purchase Call CON PUR CALL PUR CALL AMT Credit Contract CCY and Amount CON PUR CAL OFF PUR CALL AMT Debit Counter CCY and Amount 7 22 ORACLE Accounting Role Amount Tag Dr Cr CCY Purchase Put CON PUR PUT PUR PUT AMT Credit Counter CCY and Amount CON PUR PUT OFF PUR PUT AMT EQ Debit 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 ANTI DELTA AMT will be passed Accounting Role Amount Tag Dr Cr CCY Written Call CON DELTA AC DELTA AMT Debit Counter CCY and Amo
25. 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 contract 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 hedge 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 oollar if the Floor is in the mone
26. Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR IN GAIN OPT PUR INCEP GAIN 200 USD 26 Mar 03 Cr PUR OPT INCOME PUR INCEP GAIN 200 USD 26 Mar 03 Exercise Settlement EXST Final settlement Exercise settlement will happen on the 31 Mar 2003 for the above exercise Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CUSTOMER PUR SETL AMT 750 USD 31 Mar 03 Cr PUR OPT SET REC PUR SETL AMT 750 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 2 1100 USD Termination Loss 1100 800 300 USD Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr 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 300 USD 10 Oct 00 8 6 ORACLE Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Cr CUSTOMER PUR TERM LOSS 300 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 21100 FV at termination 1000 Option premium 2100 USD
27. CALL AMT EQ 1000 USD 42500 01 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 Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CON_DELTA_AC DELTA_AMT 1200 GBP 01 Jun 02 Cr 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 Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CON DELTA OFF ANTI DELTA AMT 1200 GBP 02 Jun 02 Cr CON DELTA ANTI DELTA AMT 1200 GBP 02 Jun 02 Dr CON DELTA AC DELTA AMT 900 GBP 02 Jun 02 Cr CON DELTA OFF DELTA AMT 900 GBP 02 Jun 02 Suppose the option gets knocked out on 01 Sep 2002 the entries passed will be as follows DLTA 8 27 ORACLE Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CON DELTA OFF ANTI DELTA AMT 900 GBP 01 Sep 02 Cr CON DELTA AC ANTI DELTA AMT 900 GBP 01 Sep 02
28. Exercise and Rate Reset batch is run net settlement amount for an interest rate option is calculated and stored after rate reset e actual settlement in case of an interest rate option is done only on the maturity date Arrears or schedule start date Advance Onrate 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 Ifthe 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 Ifthe 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 6 3 ORACLE 6 2 3 1 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
29. Expiration Exercise Settlement on Style Style Method to compute the payoff Look European Manual or Option s strike price is fixed at maturity Sen ony Auto Call Strike price is fixed at the lowest price 9 reached during the life of the Option Put Strike price is fixed at the highest price The Option settles at market and against the floating strike On the Maturity date user provide strike price to compute the payoff 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 Product Product Description Product Type Description Product Type Le Main Currency Options Interest Rate Options Interest Rate Options Type Rate Details Cap Strike Rate Floor Strike Rate Corridor Purchase Cap Rate Corridor Sell Cap Rate Swaption Details Swaption Style Caps v Physical Cash Settled External External Reference Contract Reference User Reference Source Code Reversed Reference Contract Details Reference Rate Details Spread Rate Code Rate S ce Rate Tenor Code Swaption Reference Swaption Value Date Swaption Maturity Date FLEXCUBE eens Germen son mires schedule rra aame roe e ns es Input B
30. 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 necessarily 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 24 ORACLE 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 Interes
31. KNOCK IN 404 10 0 entente tenete inni tn sinite seiten seine inttr etnies ttes te innen 5 36 5 5 TERMINATING OPTION CONTRACTS 4 04 Vera rnae Eosi r Tea teintes nn ra oirin E teen nnn 5 36 5 0 UPLOADING OPTIONS 8 5 37 5 6 1 Uploading Options Contract for Amendment eese nennen trennen renes 5 38 977 EXERCISING OPTION 5 39 6 AUTOMATIC DAILY PROCESSING eese esses sets suse ta sonata sesto 6 1 6 1 INTRODUCTION pe 6 1 6 2 AUTOMATIC EVENTS EXECUTED DURING END OF 6 1 6 2 1 Revaluation m 6 1 6 2 2 A MOTUZQLION ieiet Pe S 6 2 6 2 3 Auto Exercise and Rate Reset EXER 22 2 22 000000000000000000000000050500500 6 3 6 2 4 Knock In and Knock Out Event KNIN and KNOT sess enne 6 5 6 2 5 Auto Settlement EXST KIST PRPT 6 6 6 2 6 Atto EXPITY EXPR Voire E bine 6 7 7 AN
32. OPT WRI SETL AMT Debit WRI OPT SET PAY WRI SETL AMT 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 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 VAL WRI IRS WRI SWAP AMT Credit In Case of Collars the Contracts following entries will be passed Collars are not allowed for Hedge Accounting Role Amount Tag Dr Cr PUR_OPT_EXPENSE PUR_INTR_FLR_AMT Debit PUR_OPT_SET_PAY PUR_INTR_FLR_AMT Credit WRI_OPT_SET_REC WRI INTR FLR AMT Debit WRI INCOME WRI INTR FLR AMT Credit PUR OPT SET REC PUR INTR CAP AMT Debit PUR OPT INCOME PUR INTR CAP AMT Credit WRI OPT EXPENSE WRI INTR CAP AMT Debit WRI OPT SET PAY WRI INTR CAP AMT Credit In the case of Purchased or Written Collar if the Floor is in the money during final settlement Revaluation has to be triggered 9 0 Fair Value If the Cap is in the money Revaluation has to be triggered 9 final settlement amount PUR AMT or WRI AMT and the following entries would be passed Accounting Role Amount Tag Dr Cr PUR OPT EXPENSE PUR FLOOR AMT Debit 7 16 ORACLE
33. Options Bank has floating rate borrowings with details as follows Principal 50 000 000 USD Interest rate 6 Month LIBOR Rate reset dates March 31 September 30 Tenor 3 years To protect itself from an increase in interest rates the bank decides to buy an interest rate cap with the following terms Booking Date 1 Feb 2000 Value Date 31 Mar 2000 Maturity Date 31 Mar 2003 Interest Payment arrears Dates March 31 and September 30 Interest rate 6 Month LIBOR Rate fixing dates March 31 September 30 Strike Rate 9 Notional Principal 50 000 000 USD Option Premium 2 of Principal The payments from the cap transaction under different interest rate scenarios are as follows Rate 6M Payment Paid by Payment fixing LIBOR 96 date date 31 Mar 10 5 50 000 000 10 5 9 0 Counterparty to 30 Sept 2000 180 360 100 Options Bank 2000 30 Sep 11 50 000 000 11 9 Counterparty to 31 Mar 2000 180 360 100 Options Bank 2001 31 Mar 8 86 0 30 Sep 2001 2001 30 Sep 9 0 31 Mar 2001 2002 31 Mar 9 25 50 000 000 9 25 Counterparty to 30 Sep 2002 9 00 180 360 100 Options Bank 2002 30 Sep 9 5 50 000 000 9 5 9 0 Counterparty to 31 Mar 2002 180 360 100 Options Bank 2003 4 17 ORACLE Floors A floor is a series of put interest rate options with multiple
34. REVAL LOSS Previous Revaluation Loss on Written Options NET AMORT TV Net Amortized Time Value PUR NET INCEP GAIN Net Amortized Inception Gain PUR NET INCEP LOSS Net Amortized Inception Loss ORACLE Amount Tag Description WRI NET INCEP GAIN Net Amortized Inception Gain WRI NET INCEP LOSS Net Amortized Inception Loss PUR TERM FV Fair Value of Purchased opt at Termination PUR TERM GAIN Gain on Termination of Purchased Option PUR TERM LOSS Loss on Termination of Purchased Option WRI TERM FV Fair Value of Written opt at Termination WRI TERM GAIN Gain on Termination of Written Option WRI TERM LOSS Loss on Termination of Written Option HED TERM GAIN Termination Gain on Hedge Option HED TERM LOSS Termination Loss on Hedge Option HED TERM GAIN DEF Termination Gain Deferred on Hedge Option PUR INTR SETL AMT Settlement Amount on Intermediate Exercise WRI INTR SETL AMT Settlement Amount on Intermediate Exercise PUR SETL AMT Final Exercise Settlement Amount on Purchased Option WRI SETL AMT Final Exercise Settlement Amount on Written Option 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 INT
35. Receiver Id Suppress Priority Medium Name Language Address 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 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 e High 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
36. 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 tracking 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
37. Type Debit Credit Third Party Type Add Subtract Net Consideration SWIFT Qualifier Advice Charge Event Details Event For Association Event For Application Description Description Event For Liquidation Basis Amount Tag Description Description Rule Details Settlement Currency Default Waiver Rule Capitalize Description Collect LC 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 res In this screen you can define the charges for the product that you are creating 4 26 ORACLE 4 2 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
38. allowed for the Contracts created out of TD account e 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 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 Exercise Settlement on Style Style Method Plain American Manual or For American expiration style Vanilla Bermudan or Auto European 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 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 EBropaant Aute 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 option is in the money For
39. 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 e Asset or Nothing e Asian e Look back Fixed e Look back Floating 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 3 2 Specifying Security Options You will need to specify the following attributes about Security Options Option Type Indicate whether the security option you are defining is a Call option or a Put option e Acalloption gives the buyer the right to buy a stock bond index at a specified price within a specific time period If on the specified future date the market price is lower than the rate specified in the call option the buyer will not exercise the right and instead buy the instrument at the more favorable market rate 4 13 ORACLE e A putoption gives the buyer the right to sell a specified amount of an underlying security at a specified price within a specified time If on the spec
40. 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 5 2 2 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 interest period For a CO and SO 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 IROs Cos and SOs is the date on which the contract expires It is mandatory to enter the maturity date However if you
41. 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 are handled in bulk requests itself for the following OT Knock In and Knock Out e OT Fairvalue e OT Rate Revision 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 contra
42. 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 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 22 ORACLE In the payment schedule tab the following information is displayed e Holiday treatment this is defau
43. 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 outcomes are possible depending on various interest rate scenarios Interest rate scenario Outcome Market interest rate is equal to or 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 21 ORACLE Pay off Strike Rate of iq written cap Strike Rate of purchased 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 996 So she decides to have protection in the 6
44. 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 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 su
45. however change either of these while processing the contract Typically if changed both of them will be changed 5 30 ORACLE 5 3 3 5 3 4 Hefer 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 Reference Number Events Will Event Number Event Date Event Code Description 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 31 ORACLE User Defined Fields Contract Reference Field Properties Wi Field Name Field Value 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 cus
46. 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 holiday 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 4 7 ORACLE 4 1 2 4 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 entri
47. 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 OTDXCNVL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Options Contract Fair Values Contract Reference Transaction Date Revaluation Effective Date User Reference Fair Value Counterparty Delta Factor Option Premium Premium Currency Counter Currency Inception Fair Value Contract Currency Confirmation Confirmed Date Input By Authorized By Modification Authorized ext 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 parame
48. specified date and the maturity date Bermudan exercise possible only on some pre specified dates before the maturity date and the maturity 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 in case 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 4 4 ORACLE Option Style Expiration Style Plain Vanilla American Bermudan European Binary American and European Digital European No Touch European Asian European No touch European Look back Fixed European Look back Floating European The following expiration styles are allowed for Security Options Option Style Expiration Style Plain Vanilla American Bermudan European Binary American and European Digital European No Touch European Asian European No touch European Look back Fixed European
49. 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 4 ORACLE 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 For Security Options deal should be in Security Instrument currency 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 or SO 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 adhere to the minimum and maximum deal size that you have specified as part of product preferences For SO the contract amount is the size of the option deal On entering the Strike Price and the underlying quantity in the Securities Options tab gets populated Strike Price x underlying quantity If a user enters this value system defaults the underlying quantity in the Se
50. the following e Only cash settlement is allowed for Binary Digital No touch amp Asset or Nothing e Ifthe underlying is index only cash type of settlement is allowed e Fixed amount is not allowed for Asset or Nothing Asian Look back Fixed amp Floating e For Asset or Nothing Asian or Look back option styles only European is allowed e Securities Product will be mandatory for Physical and Other type of settlement for Securities options After saving the system validates buy or sell e option buy put option sell gt securities combination product can be bank buy amp customer sell option sell put option buy 4 29 ORACLE gt Securities combination product can be bank sell amp customer buy gt YTM price quotation is applicable only for Zero Coupon Bonds Validation on Portfolio Securities From If the securities combination deal product is Bank Buy amp Customer Sell product Option buy Put Option sell From Portfolio will be Customer Portfolio e Call Option Sell Put Option Buy From Portfolio will be Bank Portfolio Securities To If the securities combination deal product is Bank Sell amp Customer Buy product Option buy Put Option sell From Portfolio will be Bank Portfolio e Call Option Sell Put Option Buy From Portfolio will be Customer Portfolio Manual exercise is permitted only if an Option is in money Options Contract Exercise else an error will be shown For th
51. values created The other values will be defaulted from the contract that is amended 5 38 ORACLE For non financial amendment the same contract can be modified The non financial fields are e Expiry Location e Expiry Time e Remarks 5 7 Exercising Option You can manually exercise specific styles of interest rate and currency options and security 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 OTDXCXER the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Option Contract Exercise Contract Reference Number Currency Counterparty Counter Currency Counterparty Description Exercise Details Swap Value Option Premium Reference Rate Currency Exercise Date Strike Price Settlement Amount Settlement Currency Foreign Exchange Product FX Reference Reference Strike Price Exercise Payment Date Securities Deal Details SE Product SE Deal Reference No Market Code Price Quotation With SE Deal DSTL Date Securities To Portfolio Id Portfolio Id SK Location SK Location SK Account SK Account Accommodate Lodge Accommodate Lodge MSTL Date MSTL Date Exposure Lines From Exposure Lines To Undelivered Undelivered Total Total Track Clean Risk Limit Track Clean Risk Limit
52. 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 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 4 12 ORACLE 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
53. 00 e Contract Currency USD e Counter Currency INR e Option premium 100 USD e Strike price 50 INN USD e Current Spot Rate 48 INR USD e Option Style Binary e Expiration style American e Barrier None e Fixed Amount to be paid 500 e Fixed Amount Currency EUR 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 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 8 30 ORACLE 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
54. 00 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 Date Cr Amount CCY Dr PUR_OPT_SET_REC PUR_INTR_SETL_AMT 500 USD 25 Sep 00 Cr PUR OPT INCOME PUR_INTR_SETL_AMT 500 USD 25 Sep 00 Exercise Settlement EXST Exercise settlement will happen on the 30 Sep 2000 for the above exercise Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CUSTOMER PUR_SETL_AMT 500 USD 30 Sep 00 Cr PUR_OPT_SET_REC PUR_SETL_AMT 500 USD 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 1296 on 26 Mar 2000 then Settlement amount 50000 12 9 180 360 100 750 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 Date
55. 200 USD 01 Feb 00 Premium Payment PRPT Actual premium payment happens on 15 Feb 2000 Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr OPT_PREM_PAY PUR_OPTION_PREM 1000 USD 15 Feb 00 Cr CUSTOMER PUR_OPTION_PREM 1000 USD 15 Feb 00 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 in a year and 30 days in a month 8 2 ORACLE Amortized inception gain till 31 May 2000 200 2 30 36 30 2 11 11 USD Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr PUR_IN_GAIN_DEF PUR_NET_INCEP_GAIN 11 11 USD 31 May 00 Cr PUR_IN_GAIN_OPT PUR_NET_INCEP_GAIN 11 11 USD 31 May 00 Next Amortization will be on 31 Aug 2000 Amt to Amortize till date 2200 5 30 36 30 227 78 USD Amt already Amortized 11 11 USD Current Amt to Amortize 27 78 11 11 216 77 USD Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr PUR_IN_GAIN_DEF PUR_NET_INCEP_GAIN 16 77 USD 31 Aug 00 Cr PUR_IN_GAIN_OPT PUR_NET_INCEP_GAIN 16 77 USD 31 Aug 00 Revaluat
56. 8 7540 M 7 18 7 511 AMDG Amortization of Deferred Gains Hedge eene enne 7 19 7 5 12 KNOT Knock Out of Currency Option esses eene nennen eene ener nennen trennen 7 20 7 5 13 Knock Out Settlement eese sees seen entente enne nene enne ee nene en nn ee EE tenere enne 7 21 7 5 14 KNIN Knock In of Currency Option 7 21 7 5 15 KIST Knock In Settlement eese sees eene entente enne nene en nete nene enne se tenere tenent enne nee 7 21 790 Delta edu BRL 7 22 7257 Event Wise Amount Ig58 4 cueste ROTER SE etn deans ERES venie deut 7 25 7 0 ADVICES GENERATED ecce cette eerte Pene EE EEE IR LENSES EE ek rona Fear eh ete EC Ree E Ee tete 7 32 8 ANNEXURE B EXAMPLES OF PROCESSING INTEREST RATE AND CURRENCY OPTIONS IN ORACLE FLEX CUBE tess 8 1 8 1 INTRODUCTION D 8 1 8 1 1 Example Interest Rate Options eitis teca eter tdi rotis erecti etes etin 6 1 6 1 2 Example II Currency Options iter a I etel be a AA 6 9 6 1 3 Example HI Equity Options iiie essct setate ee tvetsovedesvesnedbeponedscesreeseevberuteevwaevceetaavocuetss 6 16 8 1 4 Example IV Contingent Entries and Delta Accounting
57. 996 Strike Rate of floor 6 96 Notional Principal 50 000 000 USD Option Premium 1 of Principal The payments from the collar transaction are tabulated below Rate fixing 6M Payment Paid by Payment date LIBOR date 31 Mar 2000 10 5 50 000 000 10 5 9 0 180 National 30 Sept 360 100 Bank 2000 4 20 ORACLE Rate fixing 6M Payment Paid by Payment date LIBOR date 30 Sep 2000 11 0 50 000 000 11 0 9 0 180 National 31 Mar 2001 360 100 Bank 31 Mar 2001 9 0 0 30 Sep 2001 30 Sep 2001 8 0 0 31 Mar 2002 31 Mar 2002 6 0 0 30 Sep 2002 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
58. Accounting Entries and Advices for your OTC Options contains an event wise list of suggested accounting entries and advices for the module The advices 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 FLEXCUBE Chapter 9 Reports lists the possible reports that can be generated for the Module 1 2 1 Related Documents e The Procedures User Manual e The Messaging System User Manual Central Liability User Manual e The Products User Manual 1 2 2 Glossary of Icons This User Manual may refer to all or some of the following icons Icons Function New em Copy Save Delete 5 Unlock Print T Close Re open p Reverse ORACLE Icons Function n Template o Roll over M Hold Authorize Liquidate Exit Sign off le Help Add row Delete row PP Option List e Confirm 9 Enter Query Execute Query Hefer the Procedures User Manual for further details about the icons ORACLE 2 1 2 2 2 Over the Counter Options An Overview Introduction The OTC Options module in Oracle FLEXCUBE supports the complete lifecycle proces
59. 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 Outcome 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 19 ORACLE The pay off for the buyer of a collar is shown in the diagram below Pay off Strike rate of written Floor Floor 9 Premium Interest Rates 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 696 She buys a collar from National Bank at the following terms Booking Date 01 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 cap
60. COME WRI INCEP GAIN Credit PUR IV DEF PUR INCEP IV Debit OPT PREM PAY PUR INCEP IV Credit PUR TV DEF PUR INCEP TV DEF Debit ORACLE 7 5 2 7 5 3 Accounting Role Amount Tag Dr Cr OPT_PREM_PAY PUR_INCEP_TV_DEF Credit If the Time Value is not amortized then the entries passed will be Accounting Role Amount Tag Dr Cr EXP_ON_HEDGE PUR_INCEP_TV Debit OPT_PREM_PAY PUR_INCEP_TV Credit PRPT Premium Payment Accounting Role Amount Tag Dr Cr OPT_PREM_PAY PUR_OPTION_PREM Debit CUSTOMER PUR_OPTION_PREM Credit CUSTOMER WRI_OPTION_PREM Debit OPT_PREM_REC WRI_OPTION_PREM Credit REVL Revaluation of Option Accounting Role Amount Tag Dr Cr MKT_VAL_PUR_OPT PUR_REVL_GAIN Debit RV GAIN PUR OPT PUR REVL GAIN Credit MKT VAL WRI OPT WRI REVL GAIN Debit RV GAIN WRI WRI REVL GAIN Credit GAIN PUR PUR LAST REVL GAIN Debit MKT VAL PUR OPT PUR LAST REVL GAIN Credit RV GAIN WRI OPT WHRI LAST REVL GAIN Debit MKT VAL WRI OPT WHRI LAST REVL GAIN Credit RV LOSS PUR OPT PUR REVL LOSS Debit MKT VAL PUR OPT PUR REVL LOSS Credit RVL LOSS WRI OPT WRI REVL LOSS Debit VAL WRI LOSS Credit MKT VAL PUR OPT PUR LAST REVL LOSS Debit 7 10 ORACLE Accou
61. 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 Reference Number Broker Code Broker Name Payable Currency Tae Amount Liquidation Status Reference Number Code Description Brokerage Currency Amount Booking No Booking amp dvance Arrears C Consider for Discount 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 5 28 ORACLE 5 3 2 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 paya
62. Dec E R 12 Event EXPR Expiry On Expiry the deferred intrinsic value is recognized as expense Dr PUR HED EXPEN PUR_INCEP_IV 60 EU 31 Dec SE R 12 Cr PUR IV DEF PUR INCEP IV 60 EU 31 Dec R 12 Moving Inception TV to final Expense GL from Revaluation Expense GL Dr Account role code Amount tag FCY Amount FCY Date Cr CCY Dr PUR HED EXPENSE PUR INCEP TV 10 EUR 31 Dec 12 Cr EXP_ON_HEDGE PUR_INCEP_TV 10 EUR 31 Dec 12 Contract Termination TERM Now let us assume that the currency option contract was terminated on 01 Sep 2012 Termination Value User 78 EUR 8 21 ORACLE Termination Gain 78 60 Inception IV 18 EUR Accounting entries passed at termination Dr Account role code Amount tag FCY Amount FCY Date Cr CC Y Dr CUSTOMER PUR INCEP IV 60 EU 01 Jul 12 R Cr PUR_IV_DEF PUR_INCEP_IV 60 EU 01 Jul 12 R Dr CUSTOMER HED_TERM_GAIN 18 EU 01 Jul 12 R C PUR_GAIN_DEF HED_TERM_GAIN 18 EU 01 Jul 12 R R Event REVL at termination Remaining time value of the option is recognized as expense on termination TV amortized Till date 2 85 EUR As on 01 Aug 2012 Total TV to amort 10 EUR Current TV to amort 10 2 85 7 15 EUR Dr Account role code Amount tag FCY Amount FCY Date Cr CC Y Dr EXP ON HEDGE NET AMORT TV 7 15 EU 01 Sep R 12 Cr PUR_TV_DEF NET_AMORT_TV 7 15 EU 01 Sep R 12 Moving Incep
63. EF NET GAIN DEF 12 EU 31 Dec R 12 C PUR_OPT_INCOM NET_GAIN_DEF 12 EU 31 Dec R R 12 Contract Exercise EXER 8 23 ORACLE 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 2012 and contract maturity 31 Dec 2012 if it doesn t get knocked out during the barrier window Suppose the spot rate on 15 Dec 2012 is 3 2 EUR Since the strike is 3 EUR the option is in the money on this date and the buyer may exercise the option Settlement Amount 100 Contract Amount 3 2 3 20 EUR Dr Account role code Amount tag FCY Amount FCY Date Cr Y Dr PUR OPT SET R PUR INCEP IV 60 EU 15 Dec EC R 12 C PUR_IV_DEF PUR INCEP IV 60 EU 15 Dec R R 12 Dr PUR HED EXPEN HED EXER LOSS 40 EU 15 Dec SE R 12 Cr PUR EXER LOSS 40 EU 15 Dec EC R 12 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 20 EUR he is in an overall loss of 40 EUR Inception IV pay off Event AMRT on EXER Remaining time value of the option is recognized as expense at the time of Exercise TV amortized Till
64. EP LOSS C WRI EXPENSE WRI INCEP LOSS D CON WRI PUT WRI PUT AMT C CON WRI PUT OFF WRI PUT AMT D RV GAIN WRI WRI REVL GAIN D WRI INCOME WRI REVL GAIN C RV LOSS WRI OPT WRI REVL LOSS C WRI EXPENSE WRI LOSS D ORACLE CUSTOMER WHRI TERM FV C VAL WRI WRI TERM FV D PUR REBATE REC WRI TERM GAIN D WRI OPT INCOME WRI TERM GAIN C PUR REBATE PAY WRI TERM LOSS C WRI OPT EXPENSE WRI TERM LOSS D 7 5 7 TRST Termination Settlement Accounting Role Amount Tag Dr Cr CUSTOMER HED EXER LOSS C PUR REBATE PAY HED EXER LOSS D CUSTOMER HED TERM GAIN D PUR REBATE REC HED TERM GAIN C CUSTOMER HED TERM GAIN DEF D PUR REBATE REC HED TERM GAIN DEF C CUSTOMER HED TERM LOSS C PUR REBATE PAY HED TERM LOSS D 7 5 8 EXER Exercise of Options Trigger Reval 9 current FV Which is same as Settlement Amount for final Exercise Trigger AMRT for residual Amortization for final Exercise Accounting Role Amount Tag Dr Cr PUR OPT SET REC PUR INTR SETL AMT Debit PUR OPT INCOME PUR INTR SETL AMT Credit WRI EXPENSE WRI INTR SETL AMT Debit WRI OPT SET PAY WHRI INTR SETL AMT Credit PUR OPT SET REC PUR SETL AMT Debit ORACLE Accounting Role Amount Tag Dr Cr MKT_VAL_PUR_OPT PUR_SETL_AMT Credit MKT VAL WRI
65. EVL GAIN Debit WRI OPT INCOME WRI REVL GAIN Credit PUR EXPENSE PUR REVL LOSS Debit RV LOSS PUR OPT PUR REVL LOSS Credit WRI OPT EXPENSE WRI REVL LOSS Debit RV LOSS WRI WRI LOSS Credit PUR IN GAIN OPT PUR INCEP GAIN Debit PUR OPT INCOME PUR INCEP GAIN Credit WRI IN GAIN OPT WRI INCEP GAIN Debit WRI IN GAIN OPT WRI INCEP GAIN Credit PUR OPT EXPENSE PUR INCEP LOSS Debit PUR INCEP LOSS PUR INCEP LOSS Credit WRI OPT EXPENSE WRI INCEP LOSS Debit WRI INCEP LOSS 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 AMDG Amortization of Deferred Gains Hedge This event is meant only for Hedge deals Accounting Role Amount Tag Dr Cr PUR_GAIN_DEF NET_GAIN_DEF Debit PUR_OPT_INCOME NET_GAIN_DEF Credit ORACLE 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 PUR 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 Valu
66. European expiration style Only on Contract maturity date Settlement payment is always a fixed 5 14 ORACLE Option Expiration Exercise Settlement on Style Style Method amount Digital European Manual or Only on Contract maturity date only Auto Settlement payment is always a fixed amount No European Auto only Only on Contract maturity date Tough only Settlement payment is always a fixed amount Asset or American or Manual or Only on Contract maturity date NODIS European Anto Amount is equal to the spot rate at expiration at time of payoff Settlement mode is always Cash Asian American or Manual or Payoff determined by the spot rate over the European Auto life of the option If S is the Spot price and K is the Strike price the pay off when it occurs can be calculated as Max SM K 0 for a Call Option Max K SM 0 for a Put Option where SM DAILY AVERAGE Look European Manual or Option s strike price is fixed at purchase 1 oniy Auto Call Option holder can look back over the life of the Option and choose to exercise at the point when the underlying asset was priced at its highest over the life of the Option Put Option can be exercised at the asset s lowest price and settles at the selected past market price and against the fixed strike On the Maturity date user provide the settlement 5 15 ORACLE Option
67. Exercise settlement Date can be different from exercise date As part of Exercise Settlement EXST event exercise settlement will happen e Termination settlement TRST Termination settlement payment date can be different from termination date therefore this event will reverse the entries passed by the events above and process the settlement with the customer 6 6 ORACLE e This batch will process the settlement based on the settlement payment date for both auto amp manual exercise 6 2 6 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 Valu
68. I_TERM_GAIN e Termination value HED TERM GAIN Termination Value Hedge Deals HED TERM GAIN DEF IGSpHOR Iy 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 WRI REVL LOSS TERM Option Premium WRI GAIN Option Premium Trade Deals Contract Fair Value at FURCHEVL FOSS termination User I P PUR LAST REVAL GAIN Last Revaluation Gain Trade Deals WRI LAST REVAL GAIN 7 26 ORACLE Event Amount Tag Value Remarks 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 AFTER PUR REVL GAIN Current Revaluation Trade Deals REVAL Gain ON TERM WRI GAIN Recognition of total Aer triggering valuation Income revaluation process at termination PUR REVL LOSS Current Revaluation Trade Deals WRI REVL LOSS EOE After triggering DE 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 WALNET INGER GAIN amortized till date This is the remaining inception gain AFTER PUR_INCEP_GAIN Inception Fair Value Trade Deals AMORT Inception Fair Value ON TERM WRI_INCEP_LOSS Recognition of Ince
69. KNST Knock Out Settlement AMDG Amortization of Deferred Gains Hedge DOPT Booking of underlying IRS in a Swaption DLTA Delta Accounting ORACLE 7 3 Event Code Event Description TRST Termination Settlement Amount Tags The Amount Tags listed below are provided in Oracle FLEXCUBE Amount Tag Description PUR_OPTION_PREM Premium on Purchased Options WRI_OPTION_PREM Premium on Written Options PUR_INCEP_LOSS Inception Loss on Purchased Options WRI_INCEP_LOSS Inception Loss on Written Options PUR_INCEP_GAIN Inception Gain on Purchased Options PUR_INCEP_GAIN_DEF Deferred Inception Gain on Purchased Options WRI_INCEP_GAIN Inception Gain on Written Options WRI_INCEP_GAIN_DEF Deferred Inception Gain on Written Options PUR INCEP IV Intrinsic Value at Inception PUR INCEP TV Time Value at Inception PUR INCEP TV DEF Deferred Time Value at Inception PUR REVAL GAIN Revaluation Gain on Purchased Options PUR REVAL LOSS Revaluation Loss on Purchased Options PUR LAST REVAL GAIN Previous Revaluation Gain on Purchased Options PUR LAST REVAL LOSS Previous Revaluation Loss on Purchased Options WRI REVAL GAIN Revaluation Gain on Written Options WRI REVAL LOSS Revaluation Loss on Written Options WRI LAST REVAL GAIN Previous Revaluation Gain on Written Options WRI LAST
70. Lender The floating rates obtaining on the various rate reset dates are as follows Reset Date LIBOR Aug 30 1998 9 8 Feb 27 1999 9 2 Aug 30 1999 9 5 Feb 28 2000 8 9 Aug 30 2000 9 7 Feb 27 2001 10 2 The fixed and floating payments over the life of the swap will be Date Fixed Rate Payment Paid by TPL Floating Rate Payment Paid by National USD Bank USD Mar 1 50MM 9 5 181 36000 2 388 194 44 50MM 9 8 181 36000 2 463 611 11 1999 8 29 ORACLE Date Fixed Rate Payment Paid by TPL Floating Rate Payment Paid by National USD Bank USD 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 6 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 0
71. MT EQ Notional Principal offset for Written Call Option PUR CALL AMT EQ Notional Prin offset for Purchased Call Option WRI AMT Notional Principal for Written Put 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 ANTI DELTA AMT Previous Anti Delta Amount DELTA AMT Delta Amount ANTI DELTA AMT Anti Delta Amount ACCOUNT A1 __ Counterparty Currency Account 1 ACCOUNT A2 Counterparty Currency Account 2 ACCOUNT B1 Bank Currency Account 1 ACCOUNT B2 Bank Currency Account 2 7 4 ORACLE Amount Tag Description _AGREEMENT DATE_ Master Agreement Date BANK FAX Bank FAX Number BANK TEL Bank Contact Number BARRIER HIT Barrier Hit BERMUDAN DATE Bermudan Date BRANCH DATE _ Branch Date BROKER _ Broker Name _BROKER ADD1_ Broker Address line 1 _BROKER ADD2_ Broker Address line 2 _BROKER ADD3_ Broker Address line 3 _BROKER ADD4_ Broker Address line 4 BUYER Option Buyer BUY SELL Buy Sell CONTRACT AMOUNT Contract Amount CUST FAX Customer FAX Number _CUST TEL_ Customer Contact Number _DEAL TYPE_ Deal Type _DELIVERY TYPE_ Delive
72. N Inception Fair Value Trade Deals PUR GAIN DEF Option WRI_INCEP_LOSS PUR_INCEP_LOSS Option Premium Trade Deals WRI INCEP GAIN Inception Fair Value WRI GAIN DEF PUR INCEP IV Intrinsic Value at Hedge Deals Inception System Calculated BOOK PUR INCEP TV Time Value at Inception Hedge Deals PUR TV DEF System Calculated PRPT PUR OPTION PREM User Input Option Hedge and Trade WRI OPTION PREM Premium at Inception Deals AMND Only ICCF AMRT PUR NET INCEP GAIN Inception Gain to Trade Deals Amortize till date Gain WRI NET INCEP GAIN already amortized REVL PUR REVL GAIN Contract Fair Value Trade Deals WRI REVL LOSS Option Premium 7 25 ORACLE Event Amount Tag Value Remarks WRI GAIN Option Premium Trade Deals PUR REVL LOSS Contract Fair Value PUR LAST REVAL GAIN Last Revaluation Gain Trade Deals WHRI 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 CANC Reversal of entries and processing Charges Trade and hedge deals RTFX TERM PUR TERM FV Fair Value of the Hedge and Trade WRI TERM contract as input at the deals time of termination PUR TERM GAIN Termination Value FV Trade Deals at the time of WRI TERM LOSS ferminatio PUR_TERM_LOSS FV at the time of Trade Deals WR
73. NEXURE A EVENT WISE ACCOUNTING ENTRIES AND ADVICES FOR YOUR OTC 7 1 7 1 ACCOUNTING ENTRIES C 7 1 EQ DK H H HR 7 1 4 3 AMOUNT TAGS erento Scenics ses went P erae det eese etas RE Ree 7 2 T4 ACCOUNTING ROLES LI 7 7 7 5 EVENT WISE ACCOUNTING ENTRIES ceccsssssssesssssesscsevesesessssssesssesssseseesesseseusessssssessssseseeaeseesesssensseanes 7 9 7 5 1 BOOK Contract ESEA 7 9 43 2 PRPT Premium Paymelt i eios pc et bestie aia acs BS he bes enced eurer ERROR XH YU KERN SORS 7 10 7 5 3 REVL Revaluation of Option eite eite tite e EU cuu seeusevuseeveaveonevaavoseouty 7 10 7 5 4 AMRT Amortization of Inception Gain Loss eese eene eene nennen 7 11 BII TERM Contract Termination Dm 7 11 7 5 6 TERM Te rminGti CREE 7 13 7 5 7 Termination Settlement cccccccccesccessceceseceescecesecesacecsecseceecsaeceeaeecsaeceeceecsaecseneeesaeceeeeeeaeeeee 7 15 7 5 8 EXER Exercise Of opos pecus tons 7 15 7 5 9 EXST Exercise Settlement 7 1
74. On initiation of underlying swap or cash settlement Swaptions PUR_INCEP_IV Intrinsic Value at Inception Hedge Deals Only except collars HED_EXER_GAIN Payoff System Calculated Inception IV Hedge Deals Only except collars HED EXER LOSS Inception IV Payoff System Calculated Hedge Deals Only except collars PUR INCEP IV SWAP Inception IV Hedge Deals Swaptions Only REVAL ON EXER PUR REVL GAIN WRI REVL LOSS Settlement Amt Calculated Option Premium Final Exercise except Collars with Floor in the money Trade deals Only WRI REVL GAIN PUR REVL LOSS Option Premium Settlement Amt Final Exercise except Collars with Floor in Calculated the money Trade deals Only PUR REVL GAIN 0 Final Exercise for Collars with Floor in 7 28 ORACLE Event Amount Tag Value Remarks WRI REVL LOSS the money Trade deals only WRI GAIN Option Premium 0 Final Exercise for Collars with Floor in PUR REVL LOSS the money Trade deals only PUR LAST REVAL GAIN Last Revaluation Gain Final Exercise Trade WRI LAST REVAL GAIN Bonis omy PUR LAST REVAL LOSS Last Revaluation Loss Final Exercise Trade WRI LAST REVAL LOSS veals oniy NET_AMORT_TV Inception TV TV Remaining Time Value Hedge Deals amortized till date AFTER PUR REVL GAIN Current Revaluation Final Exercise Trade REVAL
75. Options Revaluation Report 10 1 ORACLE ORACLE Over the Counter Options October 2013 Version 11 3 81 02 0 Oracle Financial Services Software Limited Oracle Park Off Western Express Highway Goregaon East Mumbai Maharashira 400 063 India Worldwide Inquiries Phone 91 22 6718 3000 91 22 6718 3001 www oracle com financialservices Copyright 2007 2013 Oracle and or its affiliates All rights reserved Oracle and Java are registered trademarks of Oracle and or its affiliates Other names may be trademarks of their respective owners U S GOVERNMENT END USERS Oracle programs including any operating system integrated software any programs installed on the hardware and or documentation delivered to U S Government end users are commercial computer software pursuant to the applicable Federal Acquisition Regulation and agency specific supplemental regulations As such use duplication disclosure modification and adaptation of the programs including any operating system integrated software any programs installed on the hardware and or documentation shall be subject to license terms and license restrictions applicable to the programs No other rights are granted to the U S Government This software or hardware is developed for general use in a variety of information management applications It is not developed or intended for use in any inherently dangerous applications including applicati
76. Over the Counter Options Oracle FLEXCUBE Universal Banking Europe Cluster Release 11 3 81 02 0 October 2013 Oracle Part Number E51523 01 ORACLE FINANCIAL SERVICES 0 ORACLE Over the Counter Options Table of Contents 1 ABOUT THIS MANUAL p 1 1 ll INTRODUCTION bal e RE 1 1 1 1 1 Audiente A E R A E E S l 1 1 1 2 Acronyms Abbreviations iiie tet iei e ei RE Ferr E 1 1 1 2 ORGANIZATION ect RIEGO AEE TAEAE AE EEEE ARAE 1 1 1 2 1 Related Documents iai onte E EE A E R ese tlle pe debe A ERA 1 2 1 2 2 Glossary of COWS i pii re cH ie Fed Gee rio Pep E reete edd 1 2 2 OVER THE COUNTER OPTIONS AN OVERVIEW 00 2 1 21 Buono 2 1 2 2 OTC INSTRUMENTS AND 8 02 2 1 2 23 Interest Rate Options TROS 2 2 2 2 2 WO PLONS I 2 2 2 2 3 CUTTENCY COS Met 2 3 2 2 4 Security E 2 3 2 3 JDEPENDENCIES bie ree ED tip i e ree 2 3 3 GENERAL MAINTENANCE eere eese e teen setate 1661806 6 60100 000011010000 sens enses 010000 2000000 000000 esisel scossa sS 3 1 S I ieu ui beides babe tiM tdi er 3 1 3 1 1 Maintaini
77. Put Contract Amount Spot price Strike Contract Amount Strike price Plain vanilla price Spot price Binary Fixed amount Fixed amount Digital Fixed amount Fixed amount No touch Fixed amount Fixed amount Asset Nothing Contract Amount Spot price Contract Amount Strike price Contract Amount Strike price Spot price Contract Amount Spot price Strike Asian price Contract Amount Spot price Strike Contract Amount Strike price Look back fixed price Spot price Look back Contract Amount Spot price Strike Contract Amount Strike price floating price Spot price 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 For Securities Option with American expiration style you also need to specify the earliest date before maturity when the option can be exercised This c
78. R 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 Exercise 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 7 8 ORACLE Amount Tag Description options when the Cap is in the money PUR SWAP AMT Swap Value of Physically Settlement Swaption WRI SWAP AMT Swap Value of Physically Settlement Swaption HED EXER GAIN Exercise Gain on Hedge Option HED EXER LOSS Exercise Loss on Hedge Option PUR INCEP IV SWAP Intrinsic Value at Inception 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 A
79. R HED EXPENSE PUR INCEP TV Debit EXP ON HEDGE PUR INCEP TV Credit 7 5 6 TERM Termination Accounting Role Amount Tag Dr Cr PUR OPT INCOME HED TERM GAIN C PUR REBATE REC HED TERM GAIN D PUR GAIN DEF HED TERM GAIN DEF C PUR REBATE REC HED TERM GAIN DEF D PUR HED EXPENSE TERM LOSS D PUR REBATE PAY HED TERM LOSS C CON PUR CALL PUR CALL AMT C CON PUR CAL OFF PUR CALL AMT D PUR IN GAIN OPT PUR INCEP GAIN D PUR OPT INCOME PUR INCEP GAIN C CUSTOMER PUR INCEP IV D PUR IV DEF PUR INCEP IV C PUR INCEP LOSS PUR INCEP LOSS C 7 13 If termination gain is not to be amortized then the following entries are passed for ORACLE PUR OPT EXPENSE PUR INCEP LOSS D EXP ON HEDGE PUR INCEP TV C PUR HED EXPENSE PUR INCEP TV D CON PUR PUT PUR PUT AMT EQ C CON PUR PUT OFF PUR PUT AMT EQ D PUR OPT INCOME PUR REVL GAIN C RV GAIN PUR PUR REVL GAIN D PUR OPT EXPENSE PUR REVL LOSS D LOSS PUR PUR REVL LOSS C CUSTOMER PUR TERM FV D VAL PUR PUR TERM C CUSTOMER PUR TERM GAIN D PUR OPT INCOME PUR TERM GAIN C PUR OPT EXPENSE PUR TERM LOSS D PUR REBATE PAY PUR TERM LOSS C CON WhRI CALL WRI CALL AMT EQ C CON WRI CAL OFF WRI CALL AMT EQ D WRI IN GAIN OPT WRI GAIN D WRI OPT INCOME WRI GAIN C WRI INCEP LOSS WRI INC
80. S 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 Dr Cr PUR HED EXPENSE PUR INCEP TV Debit EXP ON HEDGE PUR INCEP TV Credit 7 5 9 EXST Exercise Settlement Accounting Role Amount Tag Dr Cr CUSTOMER PUR_SETL_AMT Debit PUR_OPT_SET_REC PUR_SETL_AMT Credit WRI_OPT_SET_PAY WRI_SETL_AMT Debit CUSTOMER WRI_SETL_AMT Credit Following entries are passed for settlement of Payout in case of Floor being in the money Accounting Role Amount Tag Dr Cr PUR_OPT_SET_PAY PUR_FLOOR_AMT Debit CUSTOMER PUR_FLOOR_AMT Credit CUSTOMER WRI_FLOOR_AMT Debit WRI_OPT_SET_REC WRI FLOOR AMT Credit 7 5 10 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 ORACLE 7 5 11 Entries for moving all Reval Gain Loss to Income Expense and Inception Gain to Income Accounting Role Amount Tag Dr Cr RV GAIN PUR OPT PUR REVL GAIN Debit PUR OPT INCOME PUR REVL GAIN Credit RV GAIN WRI OPT WRI R
81. SD 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 Here if at any time during 01 Sep 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 Explanation of Terms Associated with IRO Markets Transactions 8 31 ORACLE 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 a
82. 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 5 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 ones 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 6 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
83. act 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 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 CON DELTA OFF PREV DELTA AMT Debit Counter CCY and Amount 7 24 ORACLE Accounting Role Amount Tag Dr Cr CCY CON ANT DEL AC PREV ANTI DELTA AMT Debit Contract CCY and Amount CON ANT DEL OFF PREV ANTI 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 7 5 17 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 Event Amount Tag Value Remarks BOOK PUR OPTION PREM User Input Option Trade Deals WRI OPTION PREM Premium at Inception PUR INCEP GAI
84. aid or received It can be equal or greater than or equal to the system date If user is not entering this date system gets default System date 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 37 ORACLE 5 6 1 Note the following e with swaption style Physical cannot be uploaded e Currency options with delivery type as Physical cannot be uploaded The system 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 Deriva
85. ails are specified the system displays the following values based on the values maintained at corresponding levels Instrument Underlying Price Underlying Qty Settlement Payment Date Calculation Agent Securities Product Expiry Location Expiry Time Start Location Start Time Delivery Type Product Code Specify the product code Security Currency Display the security currency based on security code Security Type Display the security type based on security code 5 19 ORACLE Underlying Price Specify the underlying price Contract Quantity Specify the contract quantity Settlement Payment Date Specify the settlement payment date Security Deal Reference Number Security deal reference number gets displayed during exercise of Physical and Others delivery type Delivery Type details for Security Options e Physical In this settlement type the buyer of the Option is entitled to receive or sell shares at strike price Underlying Quantity Strike price On exercise day system will trigger the securities deal in the same branch at strike price based on the Securities Deal Product mentioned at Securities Options tab This will be processed as part of manual exercise e Cash This is a method of settlement where profit will be computed and settled by cash unlike delivering the underlying securities in Physical method Call Option Buyer will receive Maximum Market Price Strike Price 0 00 Quan
86. an be the value date itself or any date after that Specifying Schedules for Options with Bermudan Expiration Style 57 ORACLE 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 Bermudan style SO option can be exercised for some pre specified dates before the maturity date and the maturity date itself Click on the Bermudan Sch button to invoke the Bermudan Schedule definition screen This button is enabled only if you have mentioned the expiration style as Bermudan Bermudan Schedule Bermudan Schedule Possible Exercise Dates ol JE 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 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 4 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
87. associating the product with a tax scheme class you have built Please note that you cannot define a tax component specific to a product Product Code Product Description Scheme Details Tax Scheme Scheme Description Transaction Level Tax Issuer Tax Component Stop Association Net Consideration Borne By Cash Outflow Add Subtract Event For Association i SWIFT Qualifier Description Default Rule Event For Application Rule Description Description Default Waiver Event For Liquidation Allow Rule Amend escriptio Description Amend After Association Basis 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 Processing OTC Securities Rebate is usually given for contracts that are knocked out before maturity due to a single or double knock out barrier hit Banks might want to give a rebate on the option premium to a certain percentage of the premium in case of a knock out The amount which is given as rebate can be credited to the counterparty s accou
88. ate Exercise settlement date will default as per the spot date which is mentioned in market definition SEDMKTCD User can override this date Deal Type Securities From Securities To Call Buy Customer Portfolio Bank Portfolio Sell Bank Portfolio Customer Portfolio Put Buy Bank Portfolio Customer Portfolio Sell Customer Portfolio Bank Portfolio Customer Portfolio is not a mandatory field Even if you do not specify a customer portfolio the system will trigger SE deal by defaulting accompany lodge 4 32 ORACLE Other Details e Combination Deal Product List of products of Bank Buy amp Customer Sell and Customer Buy amp Bank Sell based on the OTDTRONL e Security Code Instrument which is mentioned at Securities Options tab of OTDTRONL e Settlement Instruction has been maintained for the respective counterparty amp module e Deal Quantity Which is mentioned as Underlying quantity Input Price Strike Price which is mentioned in main tab of OTDTRONL This is applicable only for Physical Settlement type of delivery e Counterparty Which is mentioned in main tab of OTDTRONL e Auto MSTL This will default based on the Securities Deal Product e MSTL Date Exercise settlement date will default as per the spot date which is mentioned market definition SEDMKTCD e DSTL Date Exercise settlement date will default as per the spot date which is mentioned market definition SEDMKTCD
89. ate 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 Hate 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 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 Equity Bond Option DealType Buy 5 Sell 7 Brokerage Allowed Amortization Details Interest Rate Option Description Description Interest Rate Option Schedules Contract Type Trade Hedge 7 Amortization of Inception Gain Required 7 Amortization of Termination Gain Required Contract 7 Product Am
90. ay will be ignored and the schedule date will be retained on that day 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 ndicate that the holiday treatment should be governed by the Financial Center In such a 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 5 25 ORACLE Holiday Movement Occasionally the preferred holiday treatment the branch holiday the currency holiday or the
91. ayed 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 Intrinsic value is the amount by which the strike price of an option is in the money It is the portion of an option s price that is not lost due to the passage of time The following equations are used to calculate the intrinsic value of a call or put option mm e Option Intrinsic Value Underlying Stock s Current Price Call Strike Price e Put Option Intrinsic Value Put Strike Price Underlying Stock s Current Price Option style SO Formula Call Put Plain vanilla Quantity Spot price Strike price Quantity Strike price Spot price Binary Fixed amount Fixed amount Digital Fixed amount Fixed amount No touch Fixed amount Fixed amount Asset Nothing Qty Spot price Qty Strike price 5 6 ORACLE Asian Quantity Spot price Strike price Quantity Strike price Spot price Look back fixed Quantity Spot price Strike price Quantity Strike price Spot price Look back floating Quantity Spot price Strike price Quantity Strike price Spot price Option style CO Formula Call
92. ble 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 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 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 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 5 29 ORACLE Contract Reference Event Code Advice Details
93. bsequent 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 2 7 2 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 holiday 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 26 ORACLE On pressing the Schedule Explode button the exploded revision schedule is displayed Combined Holiday Treatment Combined Holiday Treatment Currencies or Financial Centers o az 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 7 3 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 Rev
94. 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 Accrual Details Liquidation Details Accrual Required Auto Settlement Numerator Method Y Numerator Method Actual Denominator Method Denominator Method Actual 9 Denominator Basis Denominator Basis Include To Date Include To Date Payment Details Rate Denominator v Basis Payment Method DiscountRate Source Discount Rate Cc Discount Rate Basis Discount Tenor Code i Discount Rate Spread Discount Rate Floating Component laz Interest Rate Details Main Component Rate Type 7 Rate Code Interest Rate r7 Rate Source Flatamount OOOO 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 f
95. count role code Amount tag FCY Amount FCY Date Cr Y Dr CUSTOMER PUR REBATE AMT 9 EU 31 Dec R 12 Cr PUR REBATE RE PUR REBATE AMT 9 EU 31 Dec C R 12 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 doesn t get knocked in The accounting entries and the events triggered at expiry in this case are given below Event REVL at expiry TV amortized Till date 2 2 85 EUR Total TV to amort 10 EUR Current TV to amort 10 2 85 7 15 EUR i Account role code Amount tag FCY Amount RA Date r 8 20 ORACLE Y Dr EXP ON HEDGE NET AMORT TV 7 15 EU 31 Dec R 12 Cr PUR_TV_DEF NET_AMORT_TV 7 15 EU 31 Dec R 12 Event 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 Dr Account role code Amount tag FCY Amount FCY Date Cr CC Y Dr CUSTOMER PUR REBATE AMT 9 EU 31 Dec R 12 Cr PUR OPT INCOM PUR REBATE AMT 9 EU 31
96. ct 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 movements 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 OTDXLMVL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Options Other Exposures Maintenance Contract Reference Transaction Date Limit Type Current Value FX Exposure i Interest Exposure Input By Authorized By Modification Authorized Date Time Date Time Number Open 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 t
97. ct 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 GL 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 6 2 3 Auto Exercise and Rate Reset RTFX and EXER Auto Exercise 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 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 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
98. culation of the settlement amount from the drop down list The list displays the following values gt gt gt Actual 365 360 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 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 o These liquidation details are not applicable for Securities Option 4 1 2 6 Specifying Rekey Fields 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 4 9 ORACLE 4 1 3 1 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 option
99. curities Options tab Contract amount Strike price 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 5 5 ORACLE 5 2 2 1 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 denominated Alternatively you can e
100. d Amount Currency Rebate Currency Fixed Vanilla Lower Barrier PaymentAt Maturity Barrier Window Start 1 QO Hit Date Barrier Window End Date Physical Delivery Dual Currency Deposit Foreign Exchange TD Reference Reference evens cn eres sc rra steer cs roe Tax is res Input By Authorized By Contract 7 Authorized Date Time Date Time Status You can maintain the following 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 o
101. date 2 85 EUR As on 01 Aug 2012 Total TV to amort 10 EUR Current TV to amort 10 2 85 7 15 EUR Dr Account role code Amount tag FCY Amount FCY Date Cr CC Y Dr EXP ON HEDGE NET AMORT TV 7 15 EU 15 Dec R 12 Cr PUR_TV_DEF NET_AMORT_TV 7 15 EU 15 Dec R 12 8 24 ORACLE Moving Inception TV to final Expense GL from Revaluation Expense GL on EXER after AMRT Dr Account role code Amount tag FCY Amount FCY Date Cr Y Dr PUR HED EXPEN PUR INCEP TV 10 EU 15 Dec SE R 12 Cr EXP_ON_HEDGE PUR_INCEP_TV 10 EU 15 Dec R 12 Event 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 In this example exercise event is on 15 Dec 2012 but actual payment will be on 17 Dec 2012 Dr Account role code Amount tag FCY Amount FCY Date Cr Y Dr CUSTOMER PUR SETL AMT 10 EU 17 Dec R 12 Cr PUR SET RH PUR SETL AMT 10 EU 17 Dec EC R 12 8 1 4 Example IV Contingent Entries and Delta Accounting This section is applicable only for physical currency options Let us consider the following parameters of a deal Contract Type Trade Buy or Sell Sell Call or Put Call Contract Amount 1000 Contract Curr
102. 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 34 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 Reference Number Transaction Level Tax Issuer Tax Association LI Creation ESN Component Waiver Dd 0 ong Li Creation ESN Component Tag Currency Tag Amount Tax Currency Ol LL I lt Liquidation 5 35 ORACLE 5 4 5 5 Manual Knock In Knock Out You can invoke the Knock In Knock Out screen by typing OTDXKIKO 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 Contract Reference E Barrier Window Start Date Counterparty Barrier Window End Date Barrier Type Lower Barrier Rebate Currency Strike Price Reba
103. e Trigger AMRT for residual Amortization for Trade 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 PUR OPT INCOME PUR REVL GAIN Credit RV GAIN WRI OPT WRI REVL GAIN Debit WRI OPT INCOME WRI REVL GAIN Credit PUR EXPENSE PUR REVL LOSS Debit RV LOSS PUR PUR REVL LOSS Credit WRI OPT EXPENSE WRI REVL LOSS Debit RV LOSS WRI WRI REVL LOSS Credit PUR IN GAIN OPT PUR INCEP GAIN Debit PUR OPT INCOME PUR INCEP GAIN Credit WRI IN GAIN OPT WRI INCEP GAIN Debit WRI IN GAIN OPT WRI INCEP GAIN Credit PUR OPT EXPENSE PUR INCEP LOSS Debit PUR INCEP LOSS PUR INCEP LOSS Credit WRI OPT EXPENSE WRI INCEP LOSS Debit WRI INCEP LOSS WRI INCEP LOSS Credit 7 20 ORACLE 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 7 5 13 7 5 14 7 5 15 Accounting Role Amount Tag Dr Cr PUR_HED_EXPENSE PUR_INCEP_TV Debit EXP_ON_HEDGE PUR_INCEP_TV Credit KNST Knock Out Sett
104. e REVL in case of hedge deals is also triggered before expiry of a contract In case of event AMDG being triggered expiry 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 7 ORACLE 7 Annexure A Event wise Accounting Entries and Advices for your OTC Options 7 1 7 2 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 Event Code Event Description BOOK Contract Booking AMND Contract Amendment REVR Contract Reversal Cancellation EXPR Contract Expiry TERM Contract Termination EXER Exercise of options EXST Exercise Settlement AMRT Amortization of inception Gain Loss REVL Revaluation of option RTFX Rate Fixing PRPT Premium Payment KNIN Knock In of Currency Option KIST Knock In Settlement KNOT Knock Out of Currency Option
105. e at the point when the underlying asset was priced at its highest over the life of the Option In the case of a Put the Option can be exercised at the asset s lowest price The Option settles at the selected past market price and against the fixed strike 2 Floating The Option s strike price is fixed at maturity For a Call the strike price is fixed at the lowest price reached during the life of the Option For a Put it is fixed at the highest price The Option settles at market and against the floating strike Barrier Type The following values are listed under Barrier Type e Knock In e Knock Out e Double Knock In e Double Knock Out The below listed values will not be available as part of Barrier Type however the system supports them based on barrier type amp fixed payment feature e Lock In e Lock Out e Double Lock In e Double Lock Out 4 34 ORACLE Lock in out functionality is similar to knock in out The only difference between them is for lock in out always there will be a fixed payment and this can be achieved with knock in out along with mentioning fixed amount So there will not be any new barriers Knock in Options A deal comes into existence if a pre specified asset price is met between the start and end of the barrier window The two scenarios are down and in amp up and in Down and In D amp I A form of a knock in Option whose payoff is determined by the price of the underlying asset sinking to the ba
106. e in the case of Look Back Floating Call Option System selects the lowest price for the strike price during the date of premium settlement day till exercise date when the settlement price is fixed as of the exercise date Put Option System selects the highest price for the strike price during the date of premium settlement day till exercise date when the settlement price is fixed as of the exercise date You can override the Reference Strike price during manual exercise With SE Deal Check this box to indicate the underlying Securities deal SE Product Code amp Reference SE product code gets defaulted from the option product maintenance The Exercise Payment Date is the date on which exercise amount to be paid or received in the cash settlement or other delivery type This date is greater than or equal to the system date If you do not specify this date then system defaults system date 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 strik
107. e 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 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 financial institution where the CO will expire Also indicate th
108. e price based on the FX Deal Product mentioned at Currency Options tab This will be processed as part of manual exercise e Cash This is a method of settlement where profit will be computed and settled by cash unlike delivering the underlying securities in Physical method Call Option Buyer will receive Maximum Spot Price Strike Price 0 00 Contract Amount Put Option Buyer will receive Maximum Strike Price Spot Price 0 00 Contract Amount e External In this delivery type delivery will be handled through external system e Other It s like combination of Cash amp Physical settlement In this settlement method the buyer of the Option is entitled to receive or sell shares at Spot Price Contract Amount Spot Price plus the cash profit Call Option Buyer will receive Maximum Spot Price Strike Price 0 00 Contract Amount Put Option Buyer will receive Maximum Strike Price Spot Price 0 00 Contract Amount Profit will be computed as part of this process and system will trigger the FX deal in the same branch at closing price by using the FX Deal Product mentioned at Securities Options tab This will be processed as part of manual exercise 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
109. e rate are automatically populated by the system 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 be 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 541 ORACLE 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 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 am
110. e 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 e For External Type currency options FX contract must be uploaded with Option Contract Reference Number e You cannot upload more than one foreign exchange contract for same swaption contract if you are doing this the system will throw an error e FXreference number will be displayed after uploading the FX contract 5 13 ORACLE 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 e Amendment of Option Contracts e Reversal of Option Contracts e Manual Knock in Knock out is not allowed for the Contracts created out of TD account e Termination of Option Contract is not
111. ecify the Securities Deal Product at Options Contract Input Screen 4 15 ORACLE 4 1 4 4 1 4 1 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 Product 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 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 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 16 ORACLE Example
112. ency USD Counter Currency GBP Exchange rate b n USD GBP 1 5 Option premium 2500 INR Booking Date 01 June 2002 8 25 ORACLE Contract Type Trade Value Date 01 June 2002 Premium Pay Date 01 Jun 2002 Strike price 50 INR USD Current Spot Rate 52 INR USD Option Style Plain Vanilla Expiration Style American Earliest Exercise Date 15 Oct 2002 Barrier Type Double Knock Out Barrier 53 INR USD Lower Barrier 48 INR USD Rebate 100 AUD Payment At Maturity Barrier Window Start Date 01 Sep 2002 Barrier Window End Date 01 November 2002 Maturity Date 31 Description 2002 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 2 1500 GBP On 01 Jun 2002 the booking event will trigger with the following contingent entries 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 240000 8 26 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 Date Amount CCY AMT Dr CON_WRI_CALL WRI_CALL_AMT 1500 GBP 42500 01 Jun 02 Cr CON_WRI_CAL_OFF WRI
113. ene n ene nene nennen 5 1 5 2 1 Format of Options Contract Input Screen eese eene nennen rene rem eere 5 2 5 2 2 Specifying Common Details Main Tab eese eene eene nennen nennen 5 4 5 2 3 Specifying Details Specific to Currency Option essere eene nennen 5 10 5 2 4 Settlement Method for Currency Options essere rene nemen rennen 5 14 5 2 5 Specifying Details Specific to Interest Rate Option sess eene 5 16 5 2 6 Specifying Security Option iiie iere em pii pie re Ent pete eerte nian 5 18 5 2 7 Specifying Schedules for Settlement and Rate Reset for IROS eee 5 21 5 3 SPECIFYING OTHER DETAILS FOR OTC OPTION CONTRACT esee eene eene nennen 5 28 5 3 1 Processing Brokerage on Contract eese eee eene nenne nennen trennen eren 5 28 5 3 2 Specifying Advices for Contract eese nennen nennen rennen 5 29 1 1 ORACLE 5 3 3 Viewing Event Delails edeesscennesstuniesvedatceovoesoctboctuntegnlagade EE E EEEE 5 31 5 3 4 Selecting User Defined Fields tte e the Hb reet teat 5 31 3 3 5 Levying Charges for Transaction 5 32 5 3 6 Maintaining Settlement Instruction Details eese eee nennen nennen ens 5 34 5 3 7 5 35 54 MANUAL
114. ermination 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 Accounting Role Amount Tag Dr Cr RV GAIN PUR OPT PUR REVL GAIN Debit PUR OPT INCOME PUR REVL GAIN Credit RV GAIN WRI OPT WRI REVL GAIN Debit WRI OPT INCOME WRI REVL GAIN Credit PUR OPT EXPENSE PUR REVL LOSS Debit RV LOSS PUR OPT PUR REVL LOSS Credit WRI OPT EXPENSE WRI REVL LOSS Debit RV LOSS WRI REVL LOSS Credit PUR IN GAIN OPT PUR INCEP GAIN Debit PUR OPT INCOME PUR INCEP GAIN Credit WRI IN GAIN OPT WRI GAIN Debit WRI IN GAIN OPT WRI INCEP GAIN Credit PUR OPT EXPENSE PUR INCEP LOSS Debit PUR INCEP LOSS PUR INCEP LOSS Credit WRI OPT EXPENSE WRI INCEP LOSS Debit WRI INCEP LOSS WRI INCEP LOSS Credit CUSTOMER PUR INCEP IV Debit PUR IV DEF PUR INCEP IV Credit ORACLE Accounting Role Amount Tag Dr Cr CUSTOMER HED TERM GAIN DEF Debit PUR GAIN DEF HED TERM GAIN DEF Credit termination gain Accounting Role Amount Tag Dr Cr CUSTOMER HED TERM GAIN Debit PUR OPT INCOME HED TERM GAIN Credit PUR HED EXPENSE HED TERM LOSS Debit CUSTOMER HED TERM LOSS Credit PU
115. es 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 Daily e Monthly e Quarterly 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 frequency 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 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
116. ese option styles exercise is allowed only on the maturity date e Plain vanilla with European Style Binary e Digital e Notouch Asset or Nothing Asian e Look back Fixed e Look back Floating The below fields are not applicable for Securities Option e Swap Value e Counter Currency e FX Product Code e FX Reference Reference rate in the case of Plain Vanilla e f closing price is available as on that day will be defaulted here otherwise you have to mention the reference rate to compute profit or loss e You will have an option to override this price Reference rate in the case of Asian Options e Average price of an option contract will be defaulted here e System will compute the Asian Price Average price of every day closing price of underlying from the value date till exercise date For this average price system will consider number of decimals amp rounding based on the currency definition e You can override this average price during manual exercise Tocompute the average price you have to maintain the closing price of underlying security On any day if you have not maintained the price system will consider previous day price by assuming there is no change in the price 4 30 ORACLE Reference rate in the case of Asian Options Currency Option e Average price of an option contract will be defaulted here e System will compute the Asian Price Average price of every day closing price of currency
117. etermined by the preferences that you specify ic ORACLE Options Rate Fixing Report Selection Criteria Product Code _ Rate Fixing From Reset Date To Reset Date 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 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 98 ORACLE 9 3 Period End Date The date up to which the revised rate was effective Int Ccy The currency associated
118. ettled resulting in a net cash settlement on exercise physical resulting in a foreign exchange deal on exercise or whether the contract is uploaded external or others 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 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 and Others delivery type results in the corresponding FX contract getting deleted Others is combination of Cash and Physical settlement In this settlement method the buyer of the Option is entitled to receive or sell shares at Spot Price Contract Amount Spot Price plus the cash profit e Call Option Buyer receives Maximum Spot Price Strike Price 0 00 Contract Amount e Put Option Buyer receives Maximum Strike Price Spot Price 0 00 Contract Amount Profit is computed as part of this process and system triggers the FX deal in the same branch at closing price by using the Securities Deal Product mentioned at Securities Options tab Indicating Exotics Details Here you can capture the following details Barrier Allowed Barrier s are allowed by default for non plain vanilla style options For plain vanilla COs you can opt to have bar
119. 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 knock 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 6 2 5 1 Security Options This process is executed both during BOD and EOD and executes settlement for the following events e When Securities Option being knocked out KNOT with rebate payment on maturity Event KNST will be triggered at maturity In this case event EXPR will not be triggered e When Securities Option with a knock 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 separate than the contract booking date e
120. 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 Principal 75 000 000 USD Interest rate 6 Month LIBOR Rate reset dates March 31 September 30 Tenor 3 years To protect itself from downward movement of the LIBOR below 8 National Bank decides to buy an interest rate floor with 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 8 Notional Principal 75 000 000 USD Option Premium 2 of Principal The payments from the floor transaction are tabulated below Rate fixing 6M Payment Paid by Payment date LIBOR date 31 Mar 2000 7 50 75 000 000 8 00 7 50 96 180 Counterparty 30 Sept 360 100 2000 30 Sep 2000 7 75 75 000 000 8 00 7 75 180 Counterparty 31 Mar 2001 360 100 31 Mar 2001 8 13 0 30 Sep 2001 30 Sep 2001 8 05 0 31 Mar 2002 31 Mar 2002 7 25 75 000 000 8 00 7 25 180 Counterparty 30 Sep 2002 4 18 ORACLE
121. f 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 Settlement Payment Date Specify the date on which the amount gets settled It can be equal or greater than the maturity date If user does not specify the entering this date system will default maturity date as settlement date 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 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 e Asset or Nothing e Asian e Look back fixed e Look back floating 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 5 11 ORACLE 5 2 3 1 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 s
122. from the date of value date till exercise date e User can override this average price during manual exercise compute the average price you have to maintain the closing price of currency On any day if a you have not maintained the price system will consider previous day price by assuming there is no change in the price Reference rate in the case of Look Back Fixed e Call Option System should select the highest price during the date of premium settlement day till exercise date for the settlement price when the strike price is fixed during the period e Put Option System should select the lowest price during the date of premium settlement day till exercise date for the settlement price when the strike price is fixed during the period Reference rate in the case of Look Back Floating e Reference rate will remain same as closing price of the Underlying Security e User can override this Reference rate Reference Strike Price in the case of Look Back Floating e This is applicable only for Look Back Floating Option e Call Option System will select the lowest price for the strike price during the date of premium settlement day till exercise date when the settlement price is fixed as of the exercise date e Put Option System will select the highest price for the strike price during the date of premium settlement day till exercise date when the settlement price is fixed as of the exercise date User can override the Refere
123. gainst the barrier and the lower barrier and the contract status gets updated to Knocked In or Knocked Out 6 5 ORACLE In case of a Knock Out event happening a rebate may be paid or received to or from the counter party depending on whether the options contract are purchased or written respectively Rebate is paid at the time of the option getting knocked out Hit or maturity If the rebate is to be paid at the time of Hit event KNST Knock Out Settlement gets triggered along with the event KNOT and the settlement gets done If the rebate is to be paid at maturity a queue gets populated at the time of knocking out of the option and the auto settlement batch process processes the settlement with the counter party at maturity If the rebate is applicable for an option not being knocked in during the barrier window the queue gets populated again and the settlement gets processed at the time of expiry or maturity of the contract Hence KIST Knock In Settlement gets triggered along with the event EXPR Expiry of contract at the time of expiry or maturity This process will run during EOD only 6 2 5 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
124. greement 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 4 33 ORACLE Asset or Nothing This is similar to Digital except that when it pays off the amount is equal to the underlying asset price at expiration rather than a predetermined amount The only possible settlement mode is Cash Asian An Option whose payoff depends on the average price of the underlying asset over a certain period of time as opposed to at maturity An Asian Option or Average Option is an Option where the payoff is not determined by the underlying price at maturity but by the average underlying price over the life of the option If S is the Spot price and K is the Strike price the pay off when it occurs can be calculated as Max SM K 0 for a Call Option Max K SM 0 for a Put Option where SM DAILY AVERAGE Look back Only applied to European as the Exercise Type An Option whose payoff depends from the highest or lowest price attained over predefined past period There are two types of Look back Options 1 Fixed The Option s strike price is fixed at purchase However the Option is not exercised at the market price in the case of a Call the Option holder can look back over the life of the Option and choose to exercis
125. he 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 3 1 4 Fair Value Upload Screen You can invoke the Fair Value Upload screen by typing OTDXFVUP in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Fair Value Upload Fair Value Upload 7 Upload From File File Name tmp 310114 fv Intraday Sequence Upload From File Check this box to indicate upload from the file File Name Specify the file name Intraday Sequence Specify the intraday sequence 3 6 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 Currency product and Security Options 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 t
126. he settlement currency and the local currency Example 1 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 Booking Date 1 Feb 2000 Value Date 31 Mar 2000 Maturity Date 31 Mar 2003 Interest Payment Arrears Dates Sept 30 amp Mar 31 Reference Interest rate 6 Month LIBOR Rate Fixing Lag 5 Days Reset Basis Period end Date Reset Date Movement Backward Strike Rate 996 Contract Amount USD 50000 Contract Currency USD Option Premium 296 of Principal Premium Currency USD Premium Pay Date 15 FEB 2000 Fair Value at Inception 1200 USD Numerator Method 30 EURO Denominator method 360 Denominator basis Per Annum 8 1 ORACLE Amortization Frequency Quarterly Amortization Month May Amortization Day 31 Revaluation Frequency Quarterly Revaluation Month May Revaluation Day 31 The accounting entries that will be passed in the system are as follows Contract Booking BOOK Dr Accounting Role Amount Tag FCY Amount FCY Date Cr CCY Dr MKT VAL PUR OPT PUR OPTION PREM 02 50000 USD 01 Feb 21000 00 Cr OPT_PREM_PAY PUR_OPTION_PREM 1000 USD 01 Feb 00 Dr MKT VAL PUR OPT PUR INCEP GAIN 1200 1000 USD 01 Feb 200 00 Cr PUR IN GAIN DEF PUR INCEP GAIN
127. he 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 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 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 Hefer to the pay off diagrams earlier in this section 8 33 ORACLE 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
128. ibutes 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 44 ORACLE 4 1 1 1 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 or Security Options You will need to specify the product preferences depending on the product type 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 Limit you can save the deal involving the product by providing an override The Rate Stop Limit If 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 H
129. ice of EUR 3 with December 31 2012 as the maturity date Parameters of the deal Contract Type Hedge Contract Amount 300 Contract Currency EUR Counter Currency Not applicable Option premium 70 Booking Date 1 Jun 12 Value Date 1 Jun 12 Premium Pay Date 3 Jun 12 8 16 ORACLE Settlement Date 2 Jan 13 Strike price 3 Current Rate 3 2 Option Style Plain Vanilla Expiration Style American Earliest Exercise Date 15 Oct 12 Barrier Type Double Knock Out Barrier 3 3 Lower Barrier 2 8 Rebate 9 Payment At Maturity Barrier Window Start 1 Sep 12 Date Barrier Window End 1 Nov 12 Date Revaluation Frequency Half Yearly Revaluation Start Month August Revaluation Start Day 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 willbe 300 3 2 3 60 EUR Time Value of the deal Option premium paid Intrinsic Value 70 60 10 EUR If the spot rate on the booking day was say 2 9 EUR Lower than the strike rate then the intrinsic value of the deal will be 0 and the time value will be the option premium paid 8 17 ORACLE Event BOOK
130. ified future date the market price is higher than the rate specified in the put option the buyer will not exercise the right and instead sell the instrument at the more favorable market rate Delivery Type for Security Options Options involved in a product can either be allowed to get into future SE deals Physical or you can opt for a net cash agreement on exercise Cash Settled or could be external through uploads or Others delivery You can select any of the option style from following Physical In this settlement type the buyer of the Option is entitled to receive or sell shares at strike price Underlying Quantity Strike price On exercise day system will trigger the securities deal in the same branch at strike price based on the Securities Deal Product mentioned at Securities Options tab This will be processed as part of manual exercise e Cash This is a method of settlement where profit will be computed and settled by cash unlike delivering the underlying securities in Physical method gt Call Option Buyer will receive Maximum Market Price Strike Price 0 00 Quantity gt Put Option Buyer will receive Maximum Strike Price Market Price 0 00 Quantity e External In this delivery type delivery will be handled through external system e Other It s like combination of Cash amp Physical settlement In this settlement method the buyer of the Option is entitled to receive or sell share
131. ils specific to an attribute settlement message details for example These buttons are briefly described below 5 2 ORACLE Bermudan Sch Click this icon to open the Bermudan Schedule screen Brokerage 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 Fields Click this icon to invoke the User Defined Fields screen You can indicate 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 be specified MIS 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 defi
132. ion Details Termination Value Termination Date Contract Fair Value Currency Option Premium Termination Settlement Date tice events haraes Tax Input By Checker Id Status Date Time Date Time Authorized 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 displayed 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 Termination Settlement Date Specify the date on which termination amount need to be p
133. ion Style Plain Vanilla Deal Type Call Security Code Expiry Location Put Security Currency Expiry Time HHMM Delivery Type 8 Cash Settled Security Type Start Location Physical Market Code Start Time HHMM External Underlying Price Others Underlying Quantity Settlement Payment Date Calculation Agent Exotics Fixed Payment Barrier Allowed Rebate Allowed Fixed Amount Currency Barrier Type Rebate Currency Fixed Amount Barrier Rebate Pay Fixed Vanilla events Germutan sch intrest schedule roxerage sentemon Advices charge ox us sss Maker ID Authorized By Contract Status DateTime Date Time Authorized You can maintain the following details Security Code Select the security code you need from the adjoining drop down list This list displays the following e All e Authorized Equity 5 18 ORACLE Bonds and Indices Market Code Specify market code in which the security involved in the deal is traded This will contain all valid market codes which are created in market definition screen 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 Option Style Choose the option style from the drop down menu which displays the following values Plain Vanilla Binary Digital No Touch Asset or Nothing Asian Look back Fixed Look back Floating Once the mandatory det
134. ion of Loss Gain EXPR PUR INCEP IV Inception Intrinsic Value Hedge deals only REVAL PUR_REVL_GAIN 0 Since the option ON WRI REVL LOSS expires worthless EXPR WRI REVL GAIN Option Premium 0 Option premium is the revaluation gain for PUR REVL LOSS written options PUR LAST REVAL GAIN Last Revaluation gain WRI LAST REVAL GAIN PUR LAST REVAL LOSS Last revaluation Loss WRI LAST REVAL LOSS NET AMORT TV Inception TV TV Remaining Time Value Hedge Deals amortized till date AFTER PUR REVL GAIN Current Revaluation This will be 0 on expiry REVAL Gain ON EXPR WRI REVL GAIN Recognition of reval Income After triggering revaluation process at Expiry 7 31 ORACLE Event Amount Tag Value Remarks PUR REVL LOSS WRI REVL LOSS Recognition of reval Expense Current Revaluation Loss After triggering revaluation process at Expiry This will be option premium on expiry Amortization of Deferred termination Gains AMRT ON PUR NET INCEP GAIN Inception gain Amt Remaining Inception EXPR WRI NET GAIN amortized till date Gain AFTER PUR INCEP GAIN Option Premium AMRT ON wri INCEP LOSS Inception Fair Value EXPR Recognition of Inception Gain Loss PUR INCEP LOSS Inception Fair Value WRI INCEP GAIN Option Premium Recognition of Loss Gain AMDG NET GAIN DEF Total Amt to Amort Remaining termination ON Expiry Amt Amortized till Date gains
135. ion 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 Date Cr CCY Dr RV_GAIN_PUR_OPT PUR_LAST_REVL_GAIN 200 USD 31 May 00 Cr MKT_VAL_PUR_OPT PUR_LAST_REVL_GAIN 200 USD 31 May 00 Dr MKT_VAL_PUR_OPT PUR REVL GAIN 1100 1000 USD 31 May 100 00 Cr RV_GAIN_PUR_OPT PUR_REVL_GAIN 100 USD 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 Date Cr Amount CCY Dr RV GAIN PUR OPT PUR LAST REVL GAIN 100 USD 31 Aug 00 Cr MKT_VAL_PUR_OPT PUR_LAST_REVL_GAIN 100 USD 31 Aug 00 Dr RV_LOSS_PUR_OPT PUR_REVL_LOSS 300 USD 31 Aug 00 Cr MKT VAL PUR OPT PUR REVL LOSS 300 USD 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 1196 on 25 Sep 2000 then Settlement amount 50000 11 9 180 360 100 5
136. ise 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 similar to CO and actual settlement will happen with the counter party only 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 For Securities Option spot rate can change on the date of maturity itself and they can become in the money Profit Loss computation e Profit or loss computation in the case of Plain Vanilla gt Based on the closing price of underlying security instrument e Profit or loss computation in the case of Asian Options Security Option gt System will compute the Asian Price Average price of every day closing price of underlying from the value date till exercise date For this average price system will consider number of decimals amp rounding based on the currency definition gt compute the average price user has to maintain the closing price of underlying security On any day if a user has not maintained the price system will consider previous day price by assuming there is no change in the price e Profit or loss computation in the case of Asian Options Currency Option System will compute the Asian Price Average price of every day closing price of currency from the date of value date till exercise date gt Toc
137. ision 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 5 2 7 4 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 Caps European only Auto only Schedule maturity Floors European only Auto only Schedule maturity Collars European only Auto only Schedule maturity Corridors European only Auto only Schedule maturity Swaptions American Manual only For American expiration style ad Any day between the earliest exercise date P and contract maturity date both included 5 27 ORACLE 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 5 3 Specifying Other Details for OTC Option Contract 5 3 1 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
138. ive 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 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 Security Options Securities options for Knock In and Knock Out are done based on the underlying security price Market price for the current processing date gets matched a
139. k in Option pays if the value of the underlying asset is outside a specified range barrier Double Lock Out DLO A double lockout Option pays if the value of the underlying asset remains confined within a specified range 4 36 ORACLE 5 1 5 2 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 Security Option SO 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 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 Contract 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 ty
140. l Principal for purchased Put options Contingent CON DELTA AC Contingent Delta amount Contingent CON DELTA OFF Offset for Contingent Delta Amount Contingent CON ANT DEL AC Contingent Anti Delta amount Contingent CON ANT DEL OFF Offset for Contingent Anti Delta amount Contingent 7 8 ORACLE 7 5 7 5 1 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 BOOK Contract Booking Accounting Role Amount Tag Dr Cr MKT_VAL_PUR_OPT PUR_OPTION_PREM Debit OPT_PREM_PAY PUR_OPTION_PREM Credit OPT_PREM_REC WRI_OPTION_PREM Debit MKT_VAL_WRI_OPT WRI OPTION PREM Credit PUR INCEP LOSS PUR INCEP LOSS Debit MKT VAL PUR OPT PUR INCEP LOSS Credit WRI INCEP LOSS WRI INCEP LOSS Debit MKT VAL WRI OPT WRI INCEP LOSS Credit MKT VAL PUR OPT PUR INCEP GAIN DEF Debit PUR IN GAIN DEF PUR INCEP GAIN DEF Credit MKT VAL WRI OPT WRI INCEP GAIN DEF Debit WRI IN GAIN DEF WRI INCEP GAIN DEF Credit If the Inception Gain is not amortized then the entries passed will be Accounting Role Amount Tag Dr Cr MKT VAL PUR OPT PUR INCEP GAIN Debit PUR INCOME PUR INCEP GAIN Credit MKT VAL WRI OPT WRI INCEP GAIN Debit PUR IN
141. lement Accounting Role Amount Tag Dr Cr CUSTOMER PUR_REBATE_AMT Debit PUR_REBATE_REC PUR_REBATE_AMT Credit PUR_REBATE_PAY WRI_REBATE_AMT Debit CUSTOMER WRI_REBATE_AMT Credit 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 21 ORACLE 7 5 16 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 in Annexure B Contingent Entries on BOOK Accounting Role Amount Tag Dr Cr CCY 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 WRILPUT_AMT Debit Contract CCY and Amount CON WRI PUT OFF WRI PUT AMT EQ Credit 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
142. licable 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 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 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
143. 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 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 i
144. lted 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 Move Across Month Currency Backward Cascade Schedules Financial Centre Interest Schedules 1 1 18 1 Start Date Frequency Frequency Units No of Schedules Adhere To Month End 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 5 23 ORACLE interest Split Interest Schedules
145. ly 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 25 ORACLE 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 on the 30 of April 31 of July and 315 of October 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 Product Code Product Description Component Details Stop Association Propagation Required Component cole Mp cun Description Charge
146. manual is intended for the Customer Service Representatives CSRs and staff in charge of setting up new products in your bank 1 1 2 Acronyms and Abbreviations The following are some of the acronyms and abbreviations you are likely to find in the manual OTC Over the Counter IRO Interest Rate Options CO Currency Options EOD End of Day BOD Beginning of Day FV Fair Value TV Time Value IV Intrinsic Value System the system Oracle FLEXCUBE system unless otherwise specified 1 2 Organization This manual 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 2 ORACLE Chapter 4 Defining Attributes Specific to OTC Products describes the procedure to define attributes specific to derivative products Chapter 5 Processing OTC Option Instrument lists and explains the details of an OTC option and describes how you can capture an OTC instrument Chapter 6 Automatic Daily Processing documents the Beginning and End of Day functions that are processed by the system Chapter 7 Annexure A Event Wise
147. mount FCY CCY Date Dr PUR IN GAIN OPT PUR INCEP GAIN 200 USD 26 Mar 03 Cr PUR OPT INCOME PUR INCEP GAIN 200 USD 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 Type Hedge Contract Amount 1000 Contract Currency USD Counter Currency INR Option premium 2500 INR Booking Date 01 Jun 2002 Value Date 01 Jun 2002 Premium Pay Date 01 Jun 2002 Strike price 50 INR USD Current Spot Rate 52 INR USD 8 9 ORACLE Contract Type Hedge Option Style Plain Vanilla Expiration Style American Earliest Exercise Date 15 Oct 2002 Barrier Type Double Knock Out Barrier 53 INR USD Lower Barrier 48 INR USD Rebate 100 AUD Payment At Maturity Barrier Window Start Date 01 Sep 2002 Barrier Window End Date 01 Nov 2002 Revaluation Frequency Half Yearly Revaluation Start Month August Revaluation Start Day 1 It is assumed the local currency 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 Counte
148. mp rounding based on the currency definition You can override this average price during manual exercise To compute the average price user needs to maintain the closing price of underlying security to compute the average price If user does not specify the price system consider previous day price by assuming there is no change in the price Reference rate in the case of Asian Options Currency Option Average price of an option contract gets defaulted System computes the Asian Price Average price of every day closing price of currency from the date of value date till exercise date You can override this average price during manual exercise To compute the average price you need to specify closing price of currency On any day if you do not specify the price system considers previous day price by assuming there is no change in the price 5 40 ORACLE Reference rate in the case of Look Back Fixed Call Option System selects the highest price during the date of premium settlement day till exercise date for the settlement price when the strike price is fixed during the period Put Option System selects the lowest price during the date of premium settlement day till exercise date for the settlement price when the strike price is fixed during the period Reference rate in the case of Look Back Floating Reference rate remains same as closing price of the Underlying Security You can override this Reference rate Reference Strike Pric
149. nated 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 Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr 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 31 Dec 2002 if it doesn t get knocked out during the barrier 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 Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR SET REC PUR INCEP IV 2000 INR 15 Dec 02 CR 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
150. nce Strike price during manual exercise e With SE Deal You have to check this to provide information to trigger the underlying Securities deal e SE Product Code amp Reference SE product code will default from the option product maintenance and user can t modify this A securities contract will be created by the system on saving exercise of physically settled or other type of settlement SE deal will be created only when user selects the With SE deal checkbox For such contracts the Securities product under which the SE contract is to be created has to be specified Once SE deal is triggered the contract reference number of the SE deal is also displayed on the screen On save of manual exercise SE deal will be created in unauthorized status SE deal Authorization On authorizing Exercise SE deal will not get authorized You have to manually authorize the SE deal System has to validate the related option exercise is already authorized in the system User can modify any sub system details of the auto generate SE deal before first authorization of the deal System will not allow modifying SE deal details except the sub system Charges Parties MIS etc details SE deal Deletion SE deal which is triggered as part of securities options can t be deleted from Securities Module if there is an option reference number for the deal 4 31 ORACLE On deletion of Exercise SE deal also will be deleted Exercise Payment Date This is to ca
151. nception 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 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 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 contra
152. ndow Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr CUSTOMER PUR_REBATE_AMT 300 AUD 31 Dec 02 Cr PUR_OPT_INCOME PUR_REBATE_AMT 300 AUD 31 Dec 02 EXPR Expiry On Expiry the deferred intrinsic value is recognized as expense Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR HED EXPENSE PUR_INCEP_IV 2000 INR 31 Dec 02 Cr PUR_IV_DEF PUR_INCEP_IV 2000 INR 31 Dec 02 Moving Inception TV to final Expense GL from Revaluation Expense GL Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR_HED_EXPENSE PUR_INCEP_TV 500 INR 31 Dec 02 Cr EXP_ON_HEDGE PUR_INCEP_TV 500 INR 31 Dec 02 Coniract 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 Cr PUR_IV_DEF PUR_INCEP_IV 2000 INR 01 Jul 02 Dr CUSTOMER HED_TERM_GAIN 700 INR 01 Jul 02 CR PUR_GAIN_DEF HED_TERM_GAIN 700 INR 01 Jul 02 Event REVL at termination Remaining time value of the option is recognized as expense on termination TV amortized Till date 142 86 INR
153. ne 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 that 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 RO Interest Rate Option e Currency Option SO Security Options However you cannot modify it 5 3 ORACLE 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 also 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
154. ng Branch Parameters eese 3 1 3 1 2 Maintaining Contract Fair Values anne aa 3 2 3 1 3 Maintaining Limit Tracking Other Exposure Details esee 3 4 3 1 4 Fair Value Upload Screen i be ti Ma e Ee Sven E CERE E RU Ee Eu E 3 6 4 DEFINING ATTRIBUTES SPECIFIC TO OTC PRODUCTS eese eese 4 1 412 NE 4 1 4 1 2 Specifying OTC Product Preferences eese eese eene 4 3 4 1 3 Specifying Currency Option Preferences eese eene eterne ener tee neee trennen 4 10 4 1 4 Specifying Interest Rate Option Preferences eese eerte 4 16 4 1 5 Defining Interest Rate Option Schedules esee eee 4 25 4 1 6 Defining Charge Components for a Product esee eene 4 26 4 1 7 Defining Taxes for Product aie Dye en ee yp pe te Hee vues pU asy dade ds 4 27 4 2 PROCESSING SECURITIES e iei eei eie 4 27 4 2 1 Currency and Securities Options eese eene nter eene ene ente tene tren trente entrent nenne 4 28 4 2 2 Processing AO Ur 4 28 4 2 3 min E 4 33 5 PROCESSING OTC OPTION 2001 0 0 0 0 thats sonata 5 1 9 1 INTRODUCTION p 5 1 5 2 ENTERING DETAILS OF OTC OPTION CONTRACT iseeeeeeeee e
155. ng 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 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 movements Swaptions A swaption gives the buyer an option to enter into an interest rate swap deal at a future date at a 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 gi
156. nother 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 Option Premium Exchange Rate The buyer s pay off for a put option can be graphed as follows Exchange Rate Option Premium Delivery Type for Currency Options 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 or Others delivery 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 Physical In this settlement type the buyer of the Option is entitled to receive or sell shares at strike price Contract Amount Strike price 4 11 ORACLE On exercise day system will trigger the FX deal in the same branch at strik
157. nt either at Hit or at contract maturity which is determined by the field Payment At described below Option Style Settlement Type BARRIER 4 27 ORACLE Physical Cash Other Plain Vanilla Y Y Y YES Binary Y YES Digital Y YES No touch Y KO amp DKO Asset or Nothing Y YES Asian Y Y Y YES Look back Y Y Y YES 4 2 4 Currency and Securities Options The following flow chart gives an overview of the process followed 4 2 2 Processing logic 4 28 ORACLE Index for Options product maintained at Securities Security Product Definition screen is applicable only for OTC options and once create any security with this new product it will not be applicable for securities module For this product you must specify the following e Product e Security ID e Security Description e Market for Revaluation Issuer ID e Security Currency Issue Date Start of Trading Date e initial Face value For Index type of security the following validations are performed at e Price quotation must always be price e Interest Quotation must be null Sub Systems The following are the list of subsystems which are part of Options Contract Input and all these except Interest schedule are applicable for Securities Option also e Events Bermudan Schedule e Brokerage e Settlement e Advice e Charge e Tax e MIS e Fields Validations The system validates
158. nter 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 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 option The inception intrinsic value is displ
159. nting Role Amount Tag Dr Cr RV LOSS PUR OPT PUR LAST REVL LOSS Credit VAL WRI WRI LAST REVL LOSS Debit RV LOSS WRI WRI LAST REVL LOSS Credit EXP ON HEDGE NET AMORT TV Debit PUR TV DEF NET AMORT TV Credit 7 5 4 Amortization of Inception Gain Loss Accounting Role Amount Tag Dr Cr PUR IN GAIN DEF PUR NET INCEP GAIN Debit PUR IN GAIN OPT PUR NET INCEP GAIN Credit WRI IN GAIN DEF WRI NET INCEP GAIN Debit WRI IN GAIN OPT WRI NET INCEP GAIN 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 Amount Tag Dr Cr CUSTOMER PUR TERM FV Debit MKT VAL PUR OPT PUR TERM FV Credit MKT VAL WRI OPT WRI TERM FV Debit CUSTOMER WRI TERM FV Credit CUSTOMER PUR TERM GAIN Debit PUR OPT INCOME PUR TERM GAIN Credit WRI OPT EXPENSE WRI TERM LOSS Debit CUSTOMER WRI TERM LOSS Credit PUR OPT EXPENSE PUR TERM LOSS Debit CUSTOMER PUR TERM LOSS Credit ORACLE Accounting Role Amount Tag Dr Cr CUSTOMER WRI TERM GAIN Debit WRI INCOME WRI TERM GAIN Credit Termination Loss FV 9 T
160. o Currency options Currency Security Bond 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 4 3 ORACLE 4 1 2 1 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 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 Delivery Type for Currency Options e Cash Settled Physical e External e Others Delivery Type for Security Options e Cash Settled e Physical External e Others 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
161. ompute the average price user has to maintain the closing price of currency On any day if a user has not maintained the price system will consider previous day price by assuming there is no change in the price 6 4 ORACLE 6 2 4 e Profit or loss computation in the case of Look Back Fixed gt Call Option System will select the highest price during the date of premium settlement day till exercise date for the settlement price when the strike price is fixed during the period gt Put Option System will select the lowest price during the date of premium settlement day till exercise date for the settlement price when the strike price is fixed during the period e Profit or loss computation in the case of Look Back Floating gt Reference Strike Price is applicable only for Look Back Floating Option gt Call Option System will select the lowest price for the strike price during the date of premium settlement day till exercise date when the settlement price is fixed as of the exercise date gt Put Option System will select the highest price for the strike price during the date of premium settlement day till exercise date when the settlement price is fixed as of the exercise date Validation Underlying security price is mandatory to compute the profit or loss 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 act
162. ons that may create a risk of personal injury If you use this software or hardware in dangerous applications then you shall be responsible to take all appropriate failsafe backup redundancy and other measures to ensure its safe use Oracle Corporation and its affiliates disclaim any liability for any damages caused by use of this software or hardware in dangerous applications This software and related documentation are provided under a license agreement containing restrictions on use and disclosure and are protected by intellectual property laws Except as expressly permitted in your license agreement or allowed by law you may not use copy reproduce translate broadcast modify license transmit distribute exhibit perform publish or display any part in any form or by any means Reverse engineering disassembly or decompilation of this software unless required by law for interoperability is prohibited The information contained herein is subject to change without notice and is not warranted to be error free If you find any errors please report them to us in writing This software or hardware and documentation may provide access to or information on content products and services from third parties Oracle Corporation and its affiliates are not responsible for and expressly disclaim all warranties of any kind with respect to third party content products and services Oracle Corporation and its affiliates will not be responsible for an
163. op right corner of the Application tool bar and clicking the adjoining arrow button Options Product Definition Product Code Exchange Rate Variance in Product Description Override Limit Product Type Stop Limit Description Rate Code Slogan Rate Type Preferred Product Group Description Start Date End Date Remarks accountng aes evens ranches customers rerences nores ns oss Maker Date Time Mod 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 Currency option product or Security Options 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 such 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 attr
164. 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 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 Security Options Auto Exercise will be applicable for Securities Option with only cash settlement type Exercise of securities option is same as currency option difference is that for currency option exercise will be done based on the currency rate and for securities options exercise will be done based on the underlying security price In the case of Currency Option even physical amp other type of settlement will be processed as part of this batch process Securities Option will be eligible for auto exercise if they have the money on the day of maturity For Securities Option settlement will be done on the exercise day itself unless otherw
165. or sell shares at Market price plus the cash profit 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 General Maintenance 3 1 Introduction As part of the general maintenance required for the successful functioning of the OTC Options module you should maintain Branch Parameters e 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 3 1 1 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 OTDXBRPM in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Branch Parameters Options Branch Code az Process Till System Date Delta Accounting Required Next Working Day 1 Input By Authorized By Modification Authorized Exit Date Time Date Time Number Open In this screen you must identify the code of
166. ortization Level Revaluation Details Amortization Frequency Amortization Start Weekday Amortization Start Day Amortization Start Month 7 Revaluation Required Contract 7 Product Revaluation Level Revaluation Frequency Rekey Fields Revaluation Start Weekday Revaluation Start Day Revaluation Start Month Common Details Expiration Style Tenor Holiday Details Holiday Treatment Holiday Currency Financial Center Holiday Movement Liquidation Details LE az Forward Backward 7 Move Across Month Numerator Method Denominator Method Denominator Basis 7 Rekey Required 7 Contract Currency Counter Currency E Premium Currency 7 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 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 security Bond option product the screen has only two tabs Main wherein you specify the common preferences applicable t
167. ount For a physically settled swaption the interest rate swap contract remains uninitiated until the manual exercise of the swaption is authorized 5 42 ORACLE 6 1 6 2 6 2 1 6 Automatic Daily Processing 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 Auto Settlement e Auto Expiry Automatic Events Executed during End of Day 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 common currency and buy sell indicator Revaluation will be performed for the specified frequency for the following events BOD EOD e Contract Exercise Final exercise only in case of IRO s e Contract termination
168. ous example the interest period is between July 01 and December 31 2003 Value date Effective date This is the business day which is the first day of the interest 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 8 32 ORACLE 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 Interest Period Txn Value Maturity Date Date BW Pa 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 t
169. paid at maturity On Knock Out deferred intrinsic value and the remaining time value is recognized as Expense Dr Account role code Amount tag FCY Amount FCY Date Cr Y Dr PUR REBATE RE PUR REBATE AMT 9 EU 10 Sep C R 12 Cr PUR OPT INCOM PUR REBATE AMT 9 EU 10 Sep E R 12 Dr PUR HED EXPEN PUR INCEP IV 60 EU 10 Sep SE R 12 Cr PUR IV DEF PUR INCEP IV 60 EU 10 Sep R 12 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 Event REVL on Knock Out TV amortized Till date 2 85 EUR Total TV to amort 10 EUR Current TV to amort 10 2 85 7 15 EUR Dr Account role code Amount tag FCY Amount FCY Date Cr CC Y Dr EXP ON HEDGE NET AMORT TV 7 15 EU 10 Sep R 12 Cr PUR TV DEF NET AMORT TV 7 15 EU 10 Sep R 12 8 19 ORACLE Moving Inception TV to final Expense GL from Revaluation Expense GL Dr Account role code Amount tag FCY Amount FCY Date Cr Y Dr PUR HED PUR INCEP TV 10 EU 10 Sep SE R 12 Cr EXP ON HEDGE PUR INCEP TV 10 EU 10 Sep R 12 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 2012 are Dr Ac
170. 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 Style 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 U
171. pe 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 OTDTRONL 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 Input Summary option The 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 de
172. ption 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 Amonizedtil Vale termination Gains EXER PUR_INTR_SETL_AMT Calculated Settlement Intermediate Exercise Amt except Collars Trade and Hedge deals WRI INTR SETL AMT Calculated Settlement Intermediate Exercise Amt except Collars Trade and Hedge deals PUR SETL AMT Calculated Settlement Final Exercise except 7 27 ORACLE Event Amount Tag Value Remarks Amt Collars Trade deals WRI SETL AMT Calculated Settlement Amt Final Exercise except Collars Trade deals PUR INTR FLR AMT WRI INTR FLR AMT Calculated Settlement Amt for Collars if Floor is in the money Intermediate Exercise for Collars Trade deals PUR INTR CAP AMT WRI INTR CAP AMT Calculated Settlement Amt for Collars if Cap is in the money Intermediate Exercise for Collars Trade deals PUR FLOOR AMT WRI FLOOR AMT Calculated Settlement Amt for Collars if Floor is in the money for final exercise Final Exercise for Collars Trade deals PUR CAP AMT WRI CAP AMT Calculated Settlement Amt for Collars if Cap is in the money for final exercise Final Exercise for Collars Trade deals PUR SWAP AMT Swap Value UseR I P This is the settlement Amount for cash settled swaptions
173. ption Time Value Option Premium Inception Intrinsic Value Premium Percent Earliest Exercise Date Premium Pay date Notional amp Risk Weighted Limits Limits Maturity Holiday Details Limits Tracking Required Holiday Treatment Fair Value Limits Tracking Holiday Currency Financial Center Holiday Movement Governed By Master Agreement Remarks events Bermudan Sch wires Schedule Brokerage Settement Atices Charge ax ms us Contract Status Authorized Format of Options Contract Input Screen Hedge Trade Buy Sell m American European Bermudan Ignore Forward Backward Move Across Months 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 Main for capturing details common to all OTC options e Interest Rate Options Currency Options Security Options based on the product type IRO CO SO any one of these tabs is displayed you can capture details specific to either interest rate options or currency options or Security 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 deta
174. ptions options that get knocked in or knocked out under pre specified conditions are also supported Currency options can have either of the following delivery types e Physically Settled where the counterparties are obliged to enter into a spot foreign exchange deal on currency option e Cash Settled where the counterparties are expected to exchange money on exercise of the option e External where delivery is handled from external system Others it s combination of Physical and Cash settlement where buyer of the option is entitled to receive or sell shares at Market price plus the cash profit Security Options 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 Asset or Nothing Asian Look back Fixed Look back Floating options Barrier options options that get knocked in or knocked out under pre specified conditions are also supported Security Options can have either of the following delivery types e Physically Settled where the counterparties are obliged to enter into a spot Security deal on exercise of the Security Option e Cash Settled where the counterparties are expected to exchange money on exercise of the option e External where delivery is handled from external system e Others it s combination of Physical and Cash settlement where buyer of the option is entitled to receive
175. pture the date on which exercise amount to be paid or received in the case of cash settlement or other type of delivery This is applicable for CO amp SO It should be greater than or equal to the system date If user is not entering this date system will default system date System will process cash settlements related to option exercise based on the exercise payment date This will be part BOD batch process If the exercise date and settlement date are same settlement will happen online Securities Deal Details Basic information will be default from the Contract screen and you can over ride this Additionally you can provide additional information to trigger the Securities deal for physical delivery type e Market Code This is mandatory for SE deal you have to select this based on securities module maintenance e This is mandatory if settlement type is Physical other Cash e DSTL Date Exercise settlement date will default as per the spot date which is mentioned market definition SEDMKTCD User can override this date e Price Quotation List of values will show gt Price gt Price gt 96 Premium 96 Discount Premium Discount gt Always Price will be defaulted For index this will be always price where as for equity or bonds user can select any value from the list YTM is applicable only for ZCB e Securities From To gt Portfolio gt SK location gt SK Account gt Exposure Lines gt MSTDL D
176. r 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 0 and the time value will be the option premium paid ORACLE 8 10 BOOK Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR IV DEF PUR INCEP IV 2000 INR 01 Jun 02 Cr OPT PREM PAY PUR INCEP IV 2000 INR 01 Jun 02 Dr PUR TV DEF PUR INCEP TV 500 INR 01 Jun 02 Cr OPT PREM PAY PUR INCEP TV 500 INR 01 Jun 02 PRPT Since option premium is paid on the booking date itself this event will trigger along with the BOOK event Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PREM PAY PUR OPTION PREM 2500 INR 01 Jun 02 Cr 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 Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr EXP ON HEDGE NET AMORT TV 142 86 INR 01 Jun 02 Cr 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 bar
177. r 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 Product Code The product code of the option product Contract Ref No The contract reference number of the option contract User Ref No The user reference number of the option contract Counterparty The identification of the customer Transaction Date The date of the revaluation transaction Reval Currency The currency associated with revaluation Buy or Sell The type of the contract whether buy or sell Reval Level The level at which revaluation is performed product or contract Gain Loss The gain or loss that has happened due to revaluation 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 as part of this User Manual Function ID Function Description OTDXFVUP Fair Value Upload OTDXKIKO Knock In Knock Out OTDXBRPM Option Branch Parameter OTDXCXER Option Contract Exercise OTDTRONL Options Contract Input OTDXCNVL Options Contract Fair Values OTDXCTRM OT Contract Termination OTDXLMVL Options Other Exposures Maintenance OTDPRMNT Options Product Definition OTRPRFIX Options Rate Fixing Report OTRPRVAL
178. rcentage that is to be applied over the reference rate A positive 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 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
179. rcise Type Lock out is known as No Touch Lock out or No Touch has a similar meaning to that of a Lock in For these Options the investor will get his pay off whether the underlying always trades below or higher that a certain barrier strike level Double Knock In DKI A double barrier Option has a lower barrier and an upper barrier These barriers control the Option Once either of these barriers is breached the status of the Option is immediately determined either the Option comes into existence if the barrier is a knock in barrier or ceases to exist if the barrier is a knock out barrier Double Knock In DKI A deal a Call or a Put Option 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 In cases where the Option is never knocked in the holder may receive a rebate 4 35 ORACLE Double Knock Out DKO A deal a Call or a Put Option 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 In some cases at knock out the holder may receive a rebate These Options are constructed to profit when the underlying instrument stays sideways or stagnant profiting mainly from Option premium decay of Options Double Lock In DLI Similar to a Double Knock in Option but the payoff is a fixed amount and it is only applied to American as the Exercise Type A double loc
180. red along with EXPR Expiry KNOT PUR_REBATE_AMT Rebate amount User Will be followed by at Inception KNST if Rebate is to WEI REBATE AMT be paid on Hit or Maturity Both for trade and Hedge PUR_INCEP_IV Inception Intrinsic Value Hedge deals only REVAL PUR_REVL_GAIN 0 Since the option gets ON WRI _ LOSS Knocked Out KNOT WRI REVL GAIN Option Premium 0 Option premium is the revaluation gain for PUR REVL LOSS written options PUR LAST REVAL GAIN Last Revaluation gain WRI LAST REVAL GAIN PUR LAST REVAL LOSS Last revaluation Loss WRI LAST REVAL LOSS NET AMORT TV Inception TV TV Remaining Time Value Hedge Deals amortized till date AFTER PUR REVL GAIN Current Revaluation This will be 0 on Knock REVAL Gain Out 7 30 ORACLE Event Amount Tag Value Remarks ON KNOT WRI REVL GAIN After triggering revaluation process at Recognition of reval Income Knock Out PUR_REVL_LOSS Current Revaluation This will be option WRI_REVL_LOSS Loss premium on knock Out T After triggering En revaluation process at pens Knock Out AMRT ON PUR_NET_INCEP_GAIN Inception gain Amt Remaining Inception KNOT WRI NET GAIN amortized till date Gain AFTER PUR INCEP GAIN Option Premium AMRT ON Inceptinon Fair Value KNOT WRI INCEP LOSS Recognition of Inception Gain Loss PUR INCEP LOSS Inception Fair Value WRI INCEP GAIN Option Premium Recognit
181. rier between the barrier window start date and end date Event KNOT Knock Out 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 Date Cr Amount CCY Dr PUR_REBATE_REC PUR_REBATE_AMT 300 AUD 10 Sep 02 Cr PUR OPT INCOME PUR REBATE AMT 300 AUD 10 Sep 02 ORACLE Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr PUR_HED_EXPENSE PUR_INCEP_IV 2000 INR 10 Sep 02 Cr 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 Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr EXP ON HEDGE NET AMORT TV 357 14 INR 10 Sep 02 Cr PUR_TV_DEF NET_AMORT_TV 357 14 INR 10 Sep 02 Moving Inception TV to final Expense GL from Revaluation Expense GL Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR_HED_EXPENSE PUR_INCEP_TV 500 INR 10 Sep 02
182. rier 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 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 5 12 ORACLE 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 5 2 3 2 Specifying Rebate Details Barrier options may carry rebates payable to the purchaser if th
183. ring 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 information 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 zi Forrnat POF v Outp
184. rly 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 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 following fields will not be defaulted to the contracts involving the product Amortize Inception Gain Amortize termination gain gt Revaluation required 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
185. rom the adjoining drop down list This list displays the following values e 30 Euro e 30 05 e 30 ISDA e 90 PSA e Actual 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 determine how interest is going to be calculated for each liquidation cycle 5 24 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 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
186. rrier price level Up and In U amp I An Option that can only be exercised when the price of the underlying asset reaches a set barrier level This is a type of a knock in barrier Option Knock out Options 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 The two scenarios are down and out amp up and out Down and Out D amp O A type of knock out barrier Option that ceases to exist when the price of the underlying security hits a specific barrier price level If the price of the underlying does not reach the barrier level the investor has the right to exercise their European Call or Put Option at the exercise price specified in the contract Up and Out U amp O A type of Option that ceases to exist when the price of its underlying asset has reached a pre specified price level Lock In Similar to a Knock in Option but the payoff is a fixed amount and it is only applied to American as the Exercise Type Lock in is known as One Touch Lock in or One Touch means that if the underlying reaches a certain level than a pay off will be provided to the investor If the level is above the spot price we are looking into a Call or a Put if that level is below the underlying Lock Out valuation Similar to a Knock out Option but the payoff is a fixed amount and it is only applied to American as the Exe
187. ry Type _EARLIEST EXERCISE DATE_ Earliest Exercise Date _EFFECTIVE DATE_ Effective Date _EXPIRE STYLE_ Expiration Style _EXPIRY PLACE_ Expiration Place EXPIRY TIME _ Expiration Time FIXED AMT Fixed Amount INSTRUMENT Instrument KNOCK DATE Knock Date ORACLE Amount Tag Description KNOCK RATE Knock Rate KNOCK TYPE Knock Type _MATURITY DATE_ Maturity Date MSDATYPE _ Master Agreement OPTION STYLE Option Style OPTION TYPE Option Type OUR REF NO Contract Reference Number _ Pay at Hit or Maturity PREMIUM Premium Amount PREMIUM PERCENT _ Premium Percentage PREMIUM CURRENCY Premium Currency PREMIUM DATE _ Premium Payment Date QUANTITY _ Quantity REBATE AMT Rebate Amount _RECV ADDR LN1_ Customer Address line 1 _RECV ADDR LN2_ Customer Address line 2 _RECV ADDR LN3_ Customer Address line 3 _RECV ADDR LN4_ Customer Address line 4 _RECV NAME_ Customer Name _SELLER_ Option Seller _SEND ADDR LN1_ Bank Address line 1 _SEND ADDR LN2_ Bank Address line 2 _SEND ADDR LN3_ Bank Address line 3 _SEND ADDR LN4_ Bank Address line 4 _SEND NAME_ Bank Name _STRIKE PRICE_ Strike Price ORACLE 7 4 Amount Tag Description _
188. s 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 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 Code Type Main Currency Option Currency Options Exotics Option Type C Barrier Allowed Rebate Allowed Delivery Type Cash Settled Barrier Type Payment At Hit Maturit Foreign Exchange Product Option Style 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 putoption gives the buyer the right to sell a specified quantity of a certain currency contract currency against a
189. s at Market price Quantity Market Price plus the cash profit gt Call Option Buyer will receive Maximum Market Price Strike Price 0 00 Quantity gt Put Option Buyer will receive Maximum Strike Price Market Price 0 00 Quantity Profit will be computed as part of this process and system will trigger the securities deal in the same branch at closing price by using the Securities Deal Product mentioned at Securities Options tab This will be processed as part of manual exercise 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 4 14 ORACLE e Double Knock Out A deal will cease to exist if any of the two pre specified
190. s 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 Option For entering contract details specifically pertaining to currency option contracts migrate to the Currency Options tab of the Options Contract Input screen LZ Options Contract Input Product External Reference Product Description Contract Reference Product Type User Reference Description Source FLEXCUBE Reversed Reference e Main Currency Options Interest Rate Options Contract Details Calculation Agent Option Style Plain Vanilla Deal Type Call Expiry Location Put Rate Type az Expiry Time HHMM Delivery Cash Settled Settlement Rate Source Start Location laz Q Physical Spot Rate Start Time HHMM External Exotics Rebate Fixed Payment Barrier Allowed Rebate Allowed Fixed Amount Barrier Single Knockin Rebate Fixe
191. sing of the following over the counter derivative instruments e Interest Rate Options Caps Floors Collars and Corridors Swaptions e Currency Options Plain Vanilla and Exotics e Security Options 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 Revalue outstanding contracts periodically 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
192. t 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 style European Exercise date 01 Sep 1998 Option Type Right to pay fixed rate payer s swaption Premium 1 96 of notional principal Settlement Deliverable Terms of the underlying swap between TPL and National Bank Notional Principal 50 000 000 USD 8 28 ORACLE Notional Principal 50 000 000 USD Effective Date 01 Sep 1998 Fixed Rate 9 596 p a payable semi annually Floating Rate 6 Month LIBOR Dates Fixed amp Floating Payment September 1 2001 March 1 and September 1 starting March 1 1999 and ending 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 1096 that is fixed rate has to be paid at 1096 to receive LIBOR at six monthly intervals over the next 3 years Since the market rate is higher than the strike rate 9 595 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 the swaption along with the impact of the market borrowing is diagrammatically shown as follows TPL 9 5 gt National Bank LIBOR LIBOR Market
193. t 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 6 M USD LIBOR is 496 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 5 596 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 previ
194. t Rate Option Interest Rate Option Schedules Schedule Details 108 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 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 Dai
195. tails of an option contract for successive replications with necessary additions and changes made for each specific contract 5 1 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 OTDTRONL in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button Options Contract Input Notional Line Code Risk Weighted Line Code Risk Percent Risk Weighted Amount Maker ID DateTime 5 2 1 Notional Limit Tracking Risk Weighted Limits Tracking Master Agreement Code Line Code Current Value Interest Exposure Foreign Exchange Exposure Authorized By Date Time Product External Reference 4 Of gt Product Description Contract Reference Product Type Description Number Product Type User Reference Source FLEXCUBE Reversed Reference Main Securities Option Currency Options Interest Rate Options Contract Details Counterparty Currency Contract Type Counter Currency Booking Date Strike Price Buy or Sell Value Date Contract Amount Maturity Date Broker Settlement Account Tenor Branch Settlement Account r Premium Details Inception Fair Value Expiration Style Premium Currency Ince
196. te Amount Barrier Spot Rate Maker Date Time Checker Date Time The following values get displayed here Contract reference number Customer number CIF Barrier Type which can be either single KI Single KO Double KI or a Double KO Rebate Amount If a rebate was allowed for the options contract Rebate Currency If a rebate was allowed for the options contract the applicable rebate currency Barrier The barrier price This is the predetermined exchange rate at which the contract is knocked in or knocked out Lower Barrier The lower barrier in case of a double KI or a double KO Barrier Window Start Date The knock in knock out processing start date Barrier Window End Date The knock in knock out processing end date 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 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 OTDXCTRM in the field at the top right corner of the Application tool bar and clicking the adjoining arrow button 5 36 ORACLE 5 6 OT Contract Termination Contract Reference Number Contract Type Counterparty Buy Description Currency Terminat
197. ter level Fair Value It 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 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
198. 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 Example Assume today is 15 November 16 November and 17 November 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
199. 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 2 142 86 INR As on 01 Aug 2002 Total TV to be amortized 2 500 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 500 INR 15 Dec 02 Cr EXP_ON_HEDGE PUR_INCEP_TV 500 INR 15 Dec 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 500 USD 15 Dec 02 Cr PUR_OPT_SET_REC PUR_SETL_AMT 500 USD 15 Dec 02 8 1 3 Example Ill Equity Options Call Option Bank Buy A bank buys on June 1 2012 a call option on 100 units of EDP Portugal individual stock with a strike pr
200. tion TV to final Expense GL from Revaluation Expense GL after REVL on TERM Dr Account role code Amount tag FCY Amount FCY Date Cr Y PUR HED EXPEN PUR INCEP TV 10 EU 01 Sep SE R 12 8 22 ORACLE EXP ON HEDGE PUR INCEP TV 10 EU 01 Sep Event AMDG after termination Deferred termination gain in case of hedge deals is amortized over a period from Contract termination date 01 Sep 2012 in this case to the contract maturity date Suppose according to the frequency of amortization deferred termination gain is amortized on the 01 Nov 2012 Amt to amort Till date 18 2 30 6 30 6 EUR Dr Account role code Amount tag FCY Amount FCY Date Cr CC Y Dr PUR GAIN DEF NET GAIN DEF 6 EU 01 Nov R 12 C NET GAIN DEF 6 EU 01 Nov R 12 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 18 EUR Amt already amortized 6 EUR Current amount to amortize 18 6 12 EUR Dr Account role code Amount tag FCY Amount FCY Date Cr Y Dr PUR GAIN D
201. tity Put Option Buyer will receive Maximum Strike Price Market Price 0 00 Quantity e External In this delivery type delivery will be handled through external system e Other It s like combination of Cash amp Physical settlement In this settlement method the buyer of the Option is entitled to receive or sell shares at Market price Quantity Market Price plus the cash profit Call Option Buyer will receive Maximum Market Price Strike Price 0 00 Quantity Put Option Buyer will receive Maximum Strike Price Market Price 0 00 Quantity Profit will be computed as part of this process and system will trigger the securities deal in the same branch at closing price by using the Securities Deal Product mentioned at Securities Options tab This will be processed as part of manual exercise Expiration Style for Security Options For American style option can be exercised between any pre specified date and maturity date For European style option can be exercised with only Maturity date For Bermudan style opton can be exercised between pre specified dates before the maturity date and the maturity date itself For Securities Option with American expiration style you also need to specify the earliest date before maturity when the option can be exercised This can be the value date itself or any date after that 5 20 ORACLE 5 2 7 Specifying Schedules for Settlement and Rate Reset for IROs For caps
202. tive 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 Reference 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
203. tomer 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 contracts 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 32 ORACLE Contract Reference Association Application Liquidation Association amp amp creation ESN Component Component Description Rule Consider as Discou o 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 app
204. 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 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 Option Style Choose the option style from the drop down menu which displays the following values e Plain Vanilla Binary Digital e No Touch Asset or Nothing Asian Look back Fixed e Look back Floating 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 Security 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 Foreign exchange product is not applicable for SO For physical and other delivery type user has to sp
205. unt 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 OFF 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 CON DELTA AC PREV DELTA AMT Credit Contract CCY 7 23 ORACLE Accounting Role Amount Tag Dr Cr 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 Contr
206. ut Output C Print C View Spool Printer Printer a 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 generated from the options provided in the drop down list The following options are available e HTML e RTF i 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 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 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 d
207. ution 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 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 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 Example Scenario 1 An IRO contract you have defined happens to fall due on the 30
208. ving 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 2 2 3 2 2 4 2 3 Physically Settled where the counterparties are obliged to enter into an interest rate swap deal on exercise of the swaption Cash Settled where the counterparties are only expected to exchange money on exercise of the swaption 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 o
209. 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 4 8 ORACLE If 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 amortized 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 gt gt gt gt gt gt 30 30 05 30 ISDA 30 PSA Actual Actual Japanese Denominator Method Select the method that is used to calculate the number of days in a year for the cal
210. 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 Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr RV_GAIN_PUR_OPT PUR_LAST_REVL_GAIN 50 USD 26 Mar 03 Cr MKT_VAL_PUR_OPT PUR_LAST_REVL_GAIN 50 USD 26 Mar 03 Dr RV_LOSS_PUR_OPT PUR_REVL_LOSS 1000 USD 26 Mar 03 Cr MKT_VAL_PUR_OPT PUR_REVL_LOSS 1000 USD 26 Mar 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 Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Dr PUR_IN_GAIN_DEF PUR_NET_INCEP_GAIN 25 USD 26 Mar 03 8 8 ORACLE Dr Accounting Role Amount Tag FCY FCY Date Cr Amount CCY Cr PUR_IN_GAIN_OPT PUR_NET_INCEP_GAIN 25 USD 27 Moving Revaluation Gain Loss to Income Expense on Final Settlement Dr Cr Accounting Role Amount Tag FCY Amount FCY CCY Date Dr PUR OPT EXPENSE PUR REVL LOSS 1000 USD 26 Mar 03 Cr RV LOSS PUR OPT PUR REVL LOSS 1000 USD 26 Mar 03 Moving Inception Gain to Income on Final Settlement Dr Cr Accounting Role Amount Tag FCY A
211. 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 lgnore the holiday In which case the holiday will be ignored and the Maturity Date will be retained as per the frequency 4 6 ORACLE e Choose to follow the Local holiday The contract Maturity Date will be defaulted on the Next Working Day 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 instit
212. with the interest component Revision Rate The revised rate of interest Tenor Code The tenor code of the reference rate Rate Source 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 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 Revaluation From Date ToDate 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 Heade
213. y Date Time Authorized By Date Time Interest Rate Option Type Contract Authorized Status M 4 Dil Select the IRO type from the adjoining drop down list The list displays the following values e Cap e Floor e Collar e Corridor The type is defaulted to the contract from the product under which it is initiated and cannot be changed at the contract level 5 16 ORACLE 5 2 5 1 5 2 5 2 5 2 5 3 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 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 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 Specifying Reference Rate Details Here you can capture the following details Spread You have to indicate the spread in pe
214. y 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 amount 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 9 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 I
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