3. Underlying Asset Definition (2024)

Derivatives are contracts, which convey theright/obligation to buy or sell a specified asset at a specified priceat a specified future date. An underlying asset (or also called Commodity)of the derivative contract is the one that is to be bought or sold ona future date. Existing currencies within Oracle FLEXCUBE can be identifiedas underlying assets. For example U S Dollar (USD), which is recognizedas a currency in Oracle FLEXCUBE, would be the underlying asset for aUS Dollar option. Similarly, Equities, Bonds and Zero Coupon bonds canalso be defined as underlying assets.

This chapter details the procedures for defining Commodities (or UnderlyingAssets) in Oracle FLEXCUBE.

This chapter contains the following sections:

• Section 3.1, "Underlying Asset Definition"

3.1 Underlying Asset Definition

This section contains the following topic:

• Section 3.1.1, "Invoking Underlying Asset DefinitionScreen"

3.1.1 Invoking Underlying Asset Definition Screen

In Oracle FLEXCUBE, the underlying assets or commodities can be categorizedand maintained through the ‘Underlying Asset Definition’screen.

You can invoke this screen by typing ‘EDDCOMDF’ in the field at the top right cornerof the Application tool bar and clicking on the adjoining arrow button

To enter new recordsin this screen, click new icon. You can specify the following detailsin the screen.

Underlying Asset

Specify a name for the underlying asset here. This name that you giveto a underlying asset identifies the underlying asset throughout themodule. Ensure that the name assigned to the underlying asset is uniqueand is not used to identify any underlying asset commodity/asset. Thisis a mandatory field.

You can follow your convention for naming the commodity. However,the name should not exceed 16 characters.

Underlying Asset Description

You may provide additional details of the underlying asset here. Yourdescription for the underlying asset can be in no more than 255 characters.This description is associated with the underlying asset for informationretrieval purposes only.

Asset Type

Specify the Asset Type under which your asset should be grouped. Althoughyou can define as many asset types as required, a list of pre-definedasset types is available in Oracle FLEXCUBE. This list includes:

• Bond
• Commodity
• Currency
• Derivatives
• Equity
• Index
• Interest rates

Select the appropriate asset type from the adjoining list of options.

Note

Individual underlying asset can be mapped to anyone of the above asset types. However, while defining currency assets(like U S Dollar, Great British Pound, Japanese Yen, to name a few) youhave to strictly map them to the Asset Type – Currency. Similarlywhile defining indices (like the BSE Sensex, NYSE, LSE etc) it is mandatorythat you map them to the Asset Type – Index.

For example, while maintaining USD (U.S Dollar) as a commodity, youmust group it under the Asset type – Currency. Similarly if youcreate a commodity titled – BSESENSEX, it should be grouped underthe asset type – INDEX.

Nature of Asset

Specify the nature of the asset under which the underlying asset iscategorized. This indicates the basic nature of the underlying asset.The options available are:

• Real
• Contingent

Indicate whether the nature of the underlying asset is ‘Real’or ‘Contingent’ depending on the physical holding of theunderlying. Let us assume that you are identifying a particular currencyin Oracle FLEXCUBE as an underlying asset. In this case the nature ofthe asset will be ‘Real’. However, if you are maintainingan option on a currency swap as an underlying asset, the underlying assetor commodity is not the currency but the currency swap itself. Thereforethe underlying asset becomes a contingent asset.

Pricing Size and Underlying Pricing Unit

You can indicate how the underlying asset is priced in the marketby specifying the market price per unit of the underlying. Since everyinstrument that is processed in the system automatically inherits thecharacteristics of the underlying asset, the pricing size and the unitwill be defaulted to the Instrument.

For instance, let us assume you are maintaining the currency DEM (DeutscheMark) as a underlying asset in Oracle FLEXCUBE. If DEM is quoted in themarket in terms of 1 DEM, then the Pricing Size and the Pricing SizeUnit that you specify will be as follows:

Similarly, if you are capturing the details of the commodity titledCrude Oil and Crude Oil is quoted in the Market in terms of 1 barrel,your entries in the respective fields will be:

Examples of how to define an underlying asset in Oracle FLEXCUBE

Let us assume you want to define the following underlyings:

• DEM (Deutsche Mark)
• Crude Oil

While maintaining the details of each underlying your entries in OracleFLEXCUBE will have to be as follows:

Scenario 1 – DEM

Scenario 2 - Crude OIL