Forex options traders count the cost of stressed VAR

Stressed value-at-risk has been less controversial than the other capital charges introduced in response to the financial crisis – but some dealers say the new metric is decreasing appetite for risk in foreign exchange options markets and might drive up costs for more exotic structures. Mark Pengelly reports

Foreign exchange options can no longer escape the past. Under old trading book rules, capital was calculated using the standard value-at-risk approach, in which periods of currency volatility would rapidly fall out of the historical data used to estimate worst-case losses. That changes under Basel 2.5, which uses a stressed VAR measure to generate an additional capital charge based on a period of