SCR Calculator User Manual

Equity Options Modelling

Equity Options - European calls and puts - are modelled using the Black Scholas Formula.

• Given the option price, strike and tenor and the underlying price, an implied volatility is worked out.
• If the regulatory equity stress is a downward stress, the shocked-down underlying price is used to work out a revised option price, assuming the implied volatility stays the same. The movement in option price is the equity risk capital of this option.
• If the regulatory equity stress is a volatility stress, the implied volatility is moved and the option is repriced. The movement in option price is the equity risk capital of this option.
• The final direction of the stress - i.e. whether it is a stress or a relief - depends on the long/short position of the option.
• Due to the asymmetrical nature of equity options, the stresses of short puts tend to be the heaviest.