كتاب روابط اجتياز لـ D. Commodity Risk
D. Commodity Risk
C 52/2017 STA يسري تنفيذه من تاريخ 1/4/20211.Simplified approach
XYZ bank is exposed to a number of positions in the same commodity. The bank’s reporting currency is AED. The following positions are held in EUR:
Position | Standard units (kg) | Maturity |
Long | 128 | 4 months |
Short | -160 | 5 months |
Long | 96 | 13 months |
Short | -96 | 4 years |
Firstly, calculate the current value for these positons in the reporting currency.
The following is the current situation:
Current spot price of the commodity per unit (kg) in local currency | 5.00 | EUR per kg |
Current EUR/AED FX spot rate | 4.25 | 1 EUR = 4.25 AED |
Further calculation to the position after conversion to local reporting bank’s currency
Position | Standard units (kg) | Spot price | Value (EUR) | FX spot rate 1 EUR = 4.25 AED | Value (AED) | Maturity |
Long | 128 | 5.00 | 640 | 4.25 | 2,720 | 4 months |
Short | -160 | 5.00 | -800 | 4.25 | -3,400 | 5 months |
Long | 96 | 5.00 | 480 | 4.25 | 2,040 | 13 months |
Short | -96 | 5.00 | -480 | 4.25 | -2,040 | 4 years |
640*4.25=2,720
-800*4.25=-3,400
480*4.25=2,040
-480*4.25=-2,040
Calculate the capital charge, first a capital charge of 15% of the overall net open position in the commodity is required.
The overall net position is the sum of the long and short positions:
AED 2,720 – AED 3,400 + AED 2,040 – AED 2,040 = - AED 680
The overall net positon is short AED 680. This leads to a capital charge of AED 102 (680 * 15%) Next, a capital charge of 3% of the bank’s gross positon in the commodity is required.
The gross position is the sum of the absolute values of the long and short positions:
AED 2,720 + AED 3,400 + AED 2,040 + AED 2,040 = AED 10,200
XYZ bank’s gross position is AED 10,200. This leads to a capital charge of AED 306 (10,200 * 3%).
Now, sum the charges to find the total capital charge for this commodity. The charge for the overall net open position is AED 102, and the charge for the bank’s gross position in the commodity is AED 306.
Therefore, XYZ bank’s total market risk capital charge for positions held in this commodity is AED 102 + AED 306, or AED 408.
2.Maturity ladder approach
Recall that XYZ bank is exposed to a number of positions in the same commodity. The bank’s reporting currency is AED. The following positions are held in EUR:
Position | Standard units (kg) | Maturity |
Long | 128 | 4 months |
Short | -160 | 5 months |
Long | 96 | 13 months |
Short | -96 | 4 years |
Step 1:
First express each commodity position in terms of the standard unit of measurement, and value in the reporting currency at the current spot price.
The following is the current situation:
Current spot price of the commodity per unit (kg) in local currency | 5.00 | EUR per kg |
Current EUR/AED FX spot rate | 4.25 | 1 EUR = 4.25 AED |
This is done the same way as for the simplified approach.
Position | Standard units (kg) | Spot price | Value (EUR) | FX spot rate 1 EUR = 4.25 AED | Value (AED) | Maturity |
Long | 128 | 5.00 | 640 | 4.25 | 2,720 | 4 months |
Short | -160 | 5.00 | -800 | 4.25 | -3,400 | 5 months |
Long | 96 | 5.00 | 480 | 4.25 | 2,040 | 13 months |
Short | -96 | 5.00 | -480 | 4.25 | -2,040 | 4 years |
Step 2:
Slot each position into a time band in the maturity ladder according to its remaining maturity. Physical stocks should be allocated to the first time band.
Maturity ladder | ||
Time bands | Positions (AED) | |
Long | Short | |
0-1 months | ||
1-3 months | ||
3-6 months | 2,720 | -3,400 |
6-12 months | ||
1-2 years | 2,040 | |
2-3 years | ||
Over 3 years | -2,040 |
Step 3:
Apply a capital charge: of 1.5% to the sum of the matched long and short positions in each time band to capture spread risk.
*start with the 3-6 months’ time band.
Multiply the sum of the ling and short matched positions by the spread rate 1.5%, to calculate the capital charge: (AED 2,720 + AED 2,720) * 1.5% = AED 81.6
Step 4:
Apply a capital charge of 0.6% to the residual net position carried forward to the next relevant time band, multiplied by the number of time bands it is carried forward.
The maturity ladder approach allows for netting between unmatched long and short positions across time bands. The residual net position in a time band can be carried forward to the next relevant time band, thus offsetting exposures in time bands further out. Because this is imprecise, resulting in an “imperfect hedge”; a capital charge is required.
The residual net position in the 3-6 months’ band is short AED 680. This net position is carried forward two time bands to offset exposures in the next relevant time band, the 1-2 years’ band.
Maturity ladder | Matched position | Net position | Capital charge for spread risk rate = 1.5% | Capital charge for positions carried forward rate = 0.6% | ||
Time bands | Positions (AED) | |||||
Long | Short | |||||
0-1 months | ||||||
1-3 months | ||||||
3-6 months | 2,720 | -3,400 | 2,720 | -680 (3400-2720) | 81.6 | 8.16* |
6-12 months | ||||||
1-2 years | 2,040 | -680 | ||||
2-3 years | ||||||
Over 3 years | -2,040 |
*The capital charge is calculated as follows: AED 680 * 2 * 0.6% = AED 8.16
Step 5:
Repeat step 3 and step 4 for each time band.
When determining the matched position in each time band, take into account the residual net position carried forward.
Maturity ladder | Matched position | Net position | Capital charge for spread risk rate = 1.5% | Capital charge for positions carried forward rate = 0.6% | ||
Time bands | Positions (AED) | |||||
Long | Short | |||||
0-1 months | ||||||
1-3 months | ||||||
3-6 months | 2,720 | -3,400 | 2,720 | -680 (3400-2720) | 81.6 | 8.16 |
6-12 months | ||||||
1-2 years | 2,040 | -680 | 680 | 1,360 | 20.4* | 16.32** |
2-3 years | ||||||
Over 3 years | 1,360 | -2,040 | 1,360 | - 680 | 40.8*** |
*(680+680)*1.5% = AED 20.4
**(1,360*2*0.6%) = AED 16.32
***(1,360+1360) *1.5% = AED 40.8
Step 6:
Apply a capital charge of 15% to the overall long or short net open position.
The net position in the final time band is subject to a capital charge of 15% as to say 680 * 15% = AED 102
Step 7:
Derive the total capital charge by summing the charges for spread risk, for positions carried forward and for the overall net open position.
Capital charges | AED |
Charge for spread risk | 142.8 |
Charge for the positions carried forward | 24.48 |
Charge for the overall net position | 102 |
Total capital charge | 269.28 |
In this example, the capital charge calculated using the maturity ladder approach; AED 269.28 is significantly lower than that calculated using the simplified approach, AED 408.