Procedure

Create the following hierarchy of elementary transactions in order to depict digital options, such as one-touch binary options:

Create the hierarchy as follows:

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 transaction

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 one-touch barrier option (call or put) with European-style exercise on the Options Information tab page. Enter the following information:

Put/Call Indicator field

Specify whether the option is a put or a call.

Strike Currency field

By entering the strike currency, you determine the currency of the option.You do not need to specify a strike.Instead, enter a barrier.

Barrier Rate 1 field

Enter the rate at which the option is exercised.

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 ( ) C reate 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

Purchase/investment

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 one cash flow as an outflow, and the other as an inflow.

Choose ( ) Back and then ( ) Save

Result

You have created a one-touch barrier option as a generic transaction.

Example

The start of the term of a one-touch barrier option is 03/01/2004 and the end of the term is 11/30/2004. A rate of 0.95 EUR/USD and a strike of 0.93 EUR/USD have been agreed.

Before you can create the option as a generic transaction, you must depict the barrier 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.