Procedure

Create the following hierarchy of elementary transactions in order to depict digital options, such as hit-at-the-end options:

Create the hierarchy as follows:(The following depicts the transaction from the perspective of the owner of the option).

Create a new generic transaction.See Edit Generic Transaction for the procedure.

In the dialog structure, select the first elementary transaction and assign to it transaction form 61 (OTC option).

The system displays three tab pages.

Enter the following information on the Header Information tab page:

Start of term field.

Issue date of the option

Notification By field

Due date of the option

Purchase/Sale field

Purchase/investment

Enter any commission, charges, or premium payments on the Cash Flow tab page.

Note that, in the case of fixed cash flows, such as commission, the plus/minus sign must be taken into account, but the Direction field can be empty.The Direction field is only of significance for variable cash flows.

Flag the option as a hit-at-the-end option (in the example, up/call) with European-style exercise on the Options Information tab page. Enter the following information:

Rebate Amount and Rebate Currency fields

Amount that is to be paid for the underlying if the option is in-the-money when it becomes due.This amount does not include any accumulated interest (clean strike).

You do not need to enter the strike amount for options on foreign exchange transactions, as the amount is determined from the underlying of the specified cash flow.

Direction field

Inflow, as the example option is held.

Due Date field

Due date of rebate.

Create a transaction with transaction form 41 (foreign exchange) under the OTC Option elementary transaction.To do this, select the OTC Option elementary transaction in the dialog structure and choose Create Elementary Trans.: Next Level Select the new elementary transaction and assign to it transaction form 41.

The system displays two tab pages.

Enter the following information on the Header Information tab page:

Start of term field.

Start of term of option

Spot/forward field

Spot transaction

Purchase/Sale field

Set the indicator to Purchase/Investment Made .

Nominal Amount and Currency fields

Nominal volume and currency of spot exchange transaction.

The nominal volume does not affect the NPV calculation of the option.For technical reasons you must however make an entry in this field.

Create two cash flows on the Cash Flow tab page:One outgoing purchase cash flow and one incoming purchase cash flow.Enter the following information for both cash flows:

Cash Flow Type field

Purchase cash flow

Note that “cash flow type” is a Customizing term and can therefore be changed.The value that you select here must be assigned to the Purchase Payment Cash Flow indicator.

Due Date field

Due date of the option

CF Amount field

Amount and currency of the cash flow in question

Direction field

Flag the cash flows as outflows or inflows.

Choose Back and then Save .

Result

You have created the hit-at-the-end option as a generic transaction.

Example

A digital up of 0.93 is issued on the US dollar.The term start date is 03/01/2004 and the term end date is 11/30/2004. A rebate of 300,000 USD is agreed.

For this hit-at-the-end call option, the rebate is paid if the EUR/USD exchange rate is more than 0.93 on the exercise date.

Before you can create the option as a generic transaction, you must depict the strike as a spot exchange transaction: The rate EUR 0.93 per USD is equivalent to the quotient 93,000,000 EUR divided by 100,000,000 USD.

The following tables contain the entries that you would have to make for the generic transaction and the elementary transactions for this example.

The tab pages may also contain other fields.You do not need to make entries in fields that are not included in this table as they are not relevant for valuating the generic transaction.