SCR Calculator User Manual

Equity, Equity Options & Hedge Funds

Equities attract different levels of SCR depending on their specific type.

Hedge funds are in general considered a type of equity, and those with extra leverage will attract heavier capital charge than normal equities.

Dividend yield information is useful, e.g. when estimating capital charge under Australian LAGIC; or for representing cash yield if the asset is within a portfolio; or for Black Scholes calculation of an equity option's SCR.

For an equity option, additional inputs are needed:

• Underlying Equity Price and Strike Price are used jointly to determined the "in-the-moneyness" of the option.
• Option Price, Maturity and Discount Rate are also needed, together with Dividend Yield (entered previously) for calibrating the implied volatility.
• Currently only European options are considered.

Depending on the type of equity stress (level down vs volatility up), the equity option stress result might be positive or negative. For instance:

• A long call option will lose value in an equity down stress, but the loss is constrained to the option price.
• A long put option will GAIN value in an equity down stress, and the gain can be substantial, leading to a potentially significant negative SCR value among quite some regimes.
• A short call/put option is just the reverse of the above situations, if the regulatory equity stress is an equity down stress.
• Some regimes, e.g. LAGIC and the ICS, define an "equity volatility up" stress for options. In those circumstances, options always gain in value; and the regulatory stress will be determined by whether the investor is long or short any particular option.

By having a complete set of long/short options and their regulatory stresses defined and modelled, we can build replicating portfolios that mimic liabilities and policyholder behaviour in the SCR Calculator. There is also the "No Neg Eq Stress" button if you do not like to see any negative stresses.