Hi David, I refer to the below question in GARP Level 2 practice exam and the multiplication factor used. In the readings, it says that the Multiplication factor is subject to a floor of 3. Is this a floor or a cap - minimum or maximum. In the sense if the question mentions the multiplication factor as 2 are we supposed to change it to 3 - if thats what is meant by a floor. Once again thanks for your help. Question: 11. As a risk manager for Bank ABC, John is asked to calculate the market risk capital charge of the bank’s trading portfolio under the internal models approach using the information given in the table below. Assuming the return of the bank’s trading portfolio is normally distributed, what is the market risk capital charge of the trading portfolio? VaR (95%, 1-day) of last trading day USD 40,000 Average VaR (95%, 1-day) for last 60 trading days USD 25,000 Multiplication Factor 2 a. USD 84,582 b. USD 134,594 c. USD 189,737 d. USD 222,893 Answer: d. Explanation: Market Risk Capital Charge = MAX(40,000 x SQRT(10)/1.65 x 2.326, 2 x 25,000 x SQRT(10)/1.65 x 2.326) = 222893 Candidate is required to convert the VaR (95%, 1-day) to a 95% 10-day VaR. Topic: Operational and Integrated Risk Management Subtopic: Regulation and the Basel II Accord AIMS: Describe and contrast the major elements—including a description of the risks covered—of the two options available for the calculation of market risk: Standardized Measurement Method and Internal Models Approach Reference: “Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework—Comprehensive Version” (Basel Committee on Banking Supervision Publication, June 2006).
Hi Laksh, Right, good observation. I used this question in one of the live webinars and noted this same discrepancy. The answers don't allow for the "correct" 3x multiplier (334,340). I said i think it's a mistake and the multiplier should be 3. Re: cap or floor. It is a FLOOR. So, in my opinion, the question is flawed and it's on my errata list for GARP. The floor is k=3; so I can't make sense of k=2 Thanks, David
Laksh: FYI, here is the source Basel II with regard to the multiplier (emphasis mine): Part 2, VI. Market Risk, 4. Quantitative Standards: David
"Candidate is required to convert the VaR (95%, 1-day) to a 95% 10-day VaR." This sentence should be convert 95% VaR to 99% VaR. Otherwise, 1.65 and 2.326 in the formula is wrong.
See under IMA approach market risk is calculated at 99% CL. so its correct. refer to the link for more info:http://www.bionicturtle.com/forum/t...sk-charge-under-internal-model-approach.5765/
Thanks for your reply! I was saying there was a typo in that sentence:"Candidate is required to convert the VaR (95%, 1-day) to a 95% 10-day VaR."
This is immaterial but bothers me They should be consistent with the decimal and use either 1.645 and 2.326 or 1.65 and 2.33
