How To Fix T0450 - Accuracy of price calculation for American option is restricted

SAP Error Message - Details

• Message type: E = Error

• Message class: T0 - General Treasury

• Message number: 450

• Message text: Accuracy of price calculation for American option is restricted

Trados memory = TR

What causes this issue?

In extreme cases (either the option is far out-of-the-money, has a very
short remaining term, or has a very low volatility), the result is less
accurate.
The price calculator for American options builds 2 binomial trees with
the internally defined intervals and with halved intervals. When this
warning appears, the relative absolute difference between the result
values for both binomial trees is greater than 1/10. The result given by
the price calculator is based on an extrapolation of these two result
values. The extrapolated (output) result is usually more accurate to 1
or 2 decimal places than an individual result value.

System Response

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

How to fix this error?

Check whether the deviations from the actual value are relevant.
This warning should only appear in exceptional cases. If the warning
appears frequently, create an OSS message.

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 T0450 - Accuracy of price calculation for American option is restricted ?

  The SAP error message T0450, which states "Accuracy of price calculation for American option is restricted," typically occurs in the context of financial instruments, particularly when dealing with options pricing in SAP's Treasury and Risk Management (TRM) module. This error indicates that the system has limitations on the precision of the price calculation for American options, which can affect the valuation and risk assessment of these financial instruments.
  Cause:
  
  Precision Limitations: The error is often caused by the system's settings that restrict the precision of calculations for American options. This can be due to configuration settings in the SAP system that limit the number of decimal places used in price calculations.
  Data Input Issues: Incorrect or incomplete data inputs related to the option's parameters (like strike price, underlying asset price, volatility, etc.) can also trigger this error.
  System Configuration: The configuration of the valuation methods or the pricing models used for American options may not be set up correctly, leading to this restriction.
  
  Solution:
  
  Check Configuration Settings: Review the configuration settings in the SAP system related to the pricing of options. Ensure that the settings allow for sufficient precision in calculations. This may involve adjusting the number of decimal places allowed for price calculations.
  Validate Input Data: Ensure that all input data related to the American option is complete and accurate. Check parameters such as the underlying asset price, strike price, interest rates, and volatility.
  Update Valuation Methods: If the valuation method being used is outdated or not suitable for American options, consider updating it to a more appropriate model that can handle the complexities of American options pricing.
  Consult Documentation: Refer to SAP documentation or help resources for specific guidance on configuring the TRM module for options pricing. This may provide insights into best practices and common pitfalls.
  Contact SAP Support: If the issue persists after checking configurations and data, consider reaching out to SAP support for assistance. They may provide patches or updates that address this specific error.
  
  Related Information:
  
  American Options: Unlike European options, American options can be exercised at any time before expiration, which adds complexity to their pricing.
  Pricing Models: Common models for pricing American options include the Binomial model and the Black-Scholes model (with adjustments).
  SAP TRM Module: The Treasury and Risk Management module in SAP is designed to manage financial instruments, including derivatives like options. Proper configuration is crucial for accurate pricing and risk assessment.
  
  By addressing the configuration and data input issues, you should be able to resolve the T0450 error and ensure accurate pricing for American options in your SAP system.