Swaptions  (effective September 30, 2002)

Effective September 30, 2002.  First incorporated into the 3Q02 capital classification released by OFHEO 12/30/02.

1.  Assume swap settlement (i.e., initiation of the underlying swap) when a swap option is exercised.

2.  Calculate a “normalized” fixed-pay coupon by subtracting the spread over the index, if any, from the coupon on the fixed-rate swap leg.

3.  For all exercise types (American, Bermudan, and European), consistent with RBC Rule section 3.8.3.7, assume exercise by the party holding the swap option if the equivalent maturity Enterprise Cost of Funds is more than

                         a.  50 basis points above the normalized fixed-pay coupon, for a pay-fixed swaption (a call or ‘payor’ swaption), or

                         b.  50 basis points below the normalized fixed pay coupon for a receive-fixed swaption (a put or ‘receiver’ swaption).

4.   Amortize option premiums on a straight-line basis over the option term.  (Amortize any remaining balances upon option exercise.)