Guy - thanks for your feedback.
Guy's Feedback
1. It makes much more sense when you say option exercise was written
primarily with Swaptions in mind.
2. I agree that to use this across other asset classes we would need
to take into account sub-type relationships. I have updated the proposal
below to incorporate this different types of underlying in the option.
3. I agree with you proposed changes to the "options" element.
4. I accept your point about the "value" element being unclear in
definition. This is the cost to exercise the option.
Design Decisions
1. We need to break down the types of option into sub-types as they have
different information about their exercise. The option product categories
within FpML are currently:
* Swaptions - option on an IRS
* Equity Derivatives Options
* FX Average Rate Options
* FX Barrier Options
* FX Digital Option
* FX Simple Option
To be clear, I propose we treat "optional early termination" as part of
the termination process and nothing to do with option exercise. You might
see it as a put option on the IRS (I don't).
I propose that we categorize the option exercise not by product, but by
underlyer. The equity derivatives gives a complete list:
* basket of the below
* bond
* cash
* convertibleBond
* deposit
* equity
* exchangeTradedFund
* future
* fxRate
* index
* mutualFund
* rateIndex
* simpleCreditDefaultSwap
* simpleFra
* simpleIrSwap
I propose the last 3 only have an effective and termination date. Is this
list complete? Do the right types have effective and termination dates?
2. I renamed "options" as "numOfOptions". The new structure is below:
<xsd:element name="pricePerOption" type="Money"
minOccurs="1">
<xsd:annotation>
<xsd:documentation xml:lang="de">Zahlbare
Prämie in Abhängigkeit von der Anzahl der Optionen.</xsd:documentation>
<xsd:documentation xml:lang="en">The
amount of premium to be paid expressed as a function of the number of
options.</xsd:documentation>
</xsd:annotation>
</xsd:element>
3. I renamed "value" as "exerciseCost" and improved the documentation.
Updated Proposal
Please review the updated proposal.
Matthew Rawlings
Prime Brokerage Strategy & Architecture
+44 791 539 7824
"Guy Gurden" <guy.gurden@xxxxxxxxxxxxx>
24/03/2005 22:56
Please respond to mwg
To: <mwg@xxxxxxxxxxxxxxxxxxxxxx>
cc:
Subject: RE: FpML-MWG40 Option Exercise
Well I think the best practice was written primarily with interest
rate swap options in mind so the effective date and termination date refer
to the underlying physical interest rate swap that becomes effective as a
result of the exercise.
If this structure is to be used across other asset classes, e.g. equity
derivatives, then the physical details that you may want to include could
vary by asset class. Certainly for an equity option the effective
date/termination date will have no meaning for physical exercise so at a
minimum these elements shouldn't be mandatory in the Schema.
Your "options" element should probably be called numberOfOptions to be
consistent with the corresponding element in the equity derivs schemas
with equivalent meaning.
In the partial structure can you explain the meaning of the "value" choice
element.
<xsd:element name="value" type="Money">
<xsd:annotation>
<xsd:documentation>The size of the exercise expressed in terms of the
exercise cost.</xsd:documentation>
</xsd:annotation>
</xsd:element>
Guy
_____
From: matthew.d.rawlings@xxxxxxxxxxxx
[mailto:matthew.d.rawlings@xxxxxxxxxxxx]
Sent: Thursday, March 24, 2005 5:44 PM
To: mwg@xxxxxxxxxxxxxxxxxxxxxx
Subject: RE: FpML-MWG40 Option Exercise
Guy - you are correct.
Termination date is included in the schema and example, but remains
undefined. It is part of the best practise document but we are unsure as
to what it means.
We are hoping that within this group's review we could find usage or
eliminate this aspect of the process.
Matthew Rawlings
Prime Brokerage Strategy & Architecture
+44 791 539 7824
"Guy Gurden" <guy.gurden@xxxxxxxxxxxxx>
24/03/2005 22:35
Please respond to mwg
To: <mwg@xxxxxxxxxxxxxxxxxxxxxx>
cc:
Subject: RE: FpML-MWG40 Option Exercise
Matthew,
>> The best practise document requires a termination date. We have not
included this as we could not identify a use for it.
Your example for physical settlement includes a termination date. Is there
another one you are referring to?
<file:///C:/Temporary%20Internet%20Files/OLK72/msg_ex17_option_exercise_pa
rtial.xml> - <settlement>
<file:///C:/Temporary%20Internet%20Files/OLK72/msg_ex17_option_exercise_pa
rtial.xml> - <physical>
<effectiveDate>2005-03-15</effectiveDate>
<terminationDate>2005-03-17</terminationDate>
Guy
_____
From: matthew.d.rawlings@xxxxxxxxxxxx
[mailto:matthew.d.rawlings@xxxxxxxxxxxx]
Sent: Thursday, March 24, 2005 5:26 PM
To: mwg@xxxxxxxxxxxxxxxxxxxxxx
Cc: fpml-bpm@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Subject: FpML-MWG40 Option Exercise
Dear Messaging Working Group members.
As discussed in today's meeting, I wish to make the following proposal to
the MWG for Option Exercise.
It is based to a large extent on the ISDA Operations Working Groups's
document for Best Practise for Option Exercise Documentation:
<http://www.isda.org/c_and_a/docs/BPDocOptionsExercise.doc>
http://www.isda.org/c_and_a/docs/BPDocOptionsExercise.doc
Here is the modified schema (based on the latest from CVS), plus examples.
Significiant points:
1. An option to be exercised is identified by the contract's
tradeIdentifier. Implicitly this assumes that a contract has at most one
option. This is currently always the case but may change. There is no way
to specify more than one option currently. There is no way to identify an
option independently of the contract. This may be revised if FpML in
future supports multi-option contracts with identifiers for the options.
2. The best practise document requires a termination date. We have
not included this as we could not identify a use for it.
3. Exercise time is not included, only a date.
4. The paper process includes an "exercise advice" which is a
simple echo of the message. This is excluded from the FpML version as the
working assumption is the transport mechanism is reliable.
Matthew Rawlings
+44 791 539 7824
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