I recently started working on a project that requires me to deal with the new market risk standard issued by the Basel Committe: https://www.bis.org/bcbs/publ/d457_faq.pdf
I am trying to calculate the vega risk charge for an equity option that expires in 1.5 months. The idea behind is to apply 1bps point shock to the implied vol. surface on specific tenors, divide the delta PV by 1bps and multiply the result by the implied vol on the shocked tenor.
Following the instructions:
'The equity vega risk factors are the implied volatilities of options that reference the equity spot prices as underlyings as defined along one dimension, the maturity of the option. This is defined as the implied volatility of the option as mapped to one or several of the following maturity tenors: 0.5 years, 1 year, 3 years, 5 years and 10 years.'
and further: The assignment of risk factors to the specified tenors should be performed by linear interpolation or a method that is most consistent with the pricing functions used by the independent risk control function of a bank to report market risks or P&L to senior management.
However, expiring in 1.5 months the option should not have sensitivity on the 0.5 year tenor right? How should i interpolate in this case?
Thanks very much for all those that can provide any help. Chris