How To Fix RY804 - American Compound Option is priced like European Compound Option

SAP Error Message - Details

• Message type: E = Error

• Message class: RY - Messages for RM Basis

• Message number: 804

• Message text: American Compound Option is priced like European Compound Option

What causes this issue?

An American compound option or a compound option on an American option
needs to be valued.
However, no separate valuation model is implemented in the
system for this particular case.

System Response

The system uses the same valuation model as for European options as an
approximation.

How to fix this error?

The system issues an error message and will not allow you to continue with this transaction until the error is resolved.

Procedure for System Administrators

Error message extract from SAP system. Copyright SAP SE.

Smart SAP Assistant

• What is the cause and solution for SAP error message RY804 - American Compound Option is priced like European Compound Option ?

  The SAP error message RY804, which states that "American Compound Option is priced like European Compound Option," typically arises in the context of financial derivatives pricing within SAP's Treasury and Risk Management module. This error indicates that the system is treating an American-style compound option (which can be exercised at any time before expiration) as if it were a European-style compound option (which can only be exercised at expiration).
  Cause:
  
  Incorrect Option Type Configuration: The option may have been incorrectly configured in the system, leading the pricing engine to apply European pricing logic instead of American pricing logic.
  Model Limitations: The pricing model being used may not support American-style options, or the parameters set for the option may not align with the characteristics of an American option.
  Data Entry Errors: There may be errors in the data entered for the option, such as incorrect dates, strike prices, or other parameters that affect the pricing model.
  
  Solution:
  
  Check Configuration: Review the configuration settings for the option in the SAP system. Ensure that the option is correctly defined as an American compound option.
  Review Pricing Model: Ensure that the pricing model being used supports American options. If it does not, you may need to switch to a model that does or adjust the parameters accordingly.
  Data Validation: Validate all input data related to the option. Check for any discrepancies in the option's parameters, such as exercise dates, strike prices, and underlying asset details.
  Consult Documentation: Refer to SAP documentation or help resources for guidance on how to properly configure and price American compound options.
  Contact Support: If the issue persists after checking the above points, consider reaching out to SAP support or your internal IT team for further assistance.
  
  Related Information:
  
  American vs. European Options: Understanding the fundamental differences between American and European options is crucial. American options provide more flexibility in terms of exercise timing, which can affect their pricing.
  Pricing Models: Familiarize yourself with the various pricing models available in SAP for options, such as the Black-Scholes model or binomial models, and their applicability to different types of options.
  SAP Notes: Check for any relevant SAP Notes that may address this specific error or provide updates and patches that could resolve the issue.
  
  By following these steps, you should be able to identify the root cause of the RY804 error and implement a solution to resolve it.