Why is there an add-on amount in Basel I for derivatives transactions?“Basel I could be improved if the add-on amount for a derivatives...

I'm not aware of the exact directives in the Basel I norms with
regards to what the add-on amount for derivatives is. But your statement that "Basel I could be
improved if the add-on amount for a derivatives transaction depended on the value of the
transaction," is not right.

The additional risk that could be
acquired by banks during transactions of derivatives is many times the value of the transaction.
As an example to illustrate this point, let's take the case of call options. The party issuing
the option takes upon itself all the risk for the price of the asset rising. If the option's
strike price is $50 and the asset’s price goes up to $100, there is a loss of $50 for the seller.
The transaction amount would not equal the loss that the seller could be forced to bear but is
instead a small fraction of that.

It is therefore not sufficient for
an add-on capital requirement to be decided by the transaction cost. Capital requirements for
banks are fixed keeping in mind the risk that they are taking on. This protects the bank from
going bankrupt in case any unanticipated event actually occurs.