Methods to determine capital requirements for options

The measurement of risks associated with options is a complex business for a number of reasons. Firstly, option prices tend to be influenced in a non-linear manner by several variables. Unanticipated changes in the price or volatility of the underlying security or changes in interest rates are just some examples of these factors affecting risk measurement. Another reason why option-related risks are difficult to measure is that such risks should be examined in relation to other positions. The nature of the risks involved in options are clarified in order to help assess whether the various capital adequacy requirements proposed are reasonable. Four different bank capital adequacy schemes are examined.