How to calculate Market risk charge under internal model approach

Discussion in 'P2.T7. Operational Risk & ERM (25%)' started by crablegs, Apr 30, 2012.

  1. crablegs

    crablegs Member

    Hello,

    I thought the capital risk charge under the IMA approach was simply the higher of the previous day VaR or or the 60 days average VaR multiplied by factor no less than 3 ? Am I getting this wrong?

    I am referring to a GARP question from 2011 practice exam:

    Given:

    • VaR (95%, 1-day) of last trading day = 40,000
    • Average VaR (95%, 1-day) for last 60 trading days = 25,000
    • Multiplication factor = 2

    The answer for the capital charge to be calculated is:

    MAX [40,000 x sqrt(10)/1.65 x 2.326 ; 2 x 25,000 x sqrt(10)/1.65 x 2.326] = 222,893

    I am completely confused..... why is it not simply : MAX [40,000 x sqrt(10) ; 3 x 25,000 x sqrt(10)]

    Meaning why are they dividing by 1.65 x 2.326? Where is 2.326 coming from? And I also thought the multiplication factor was subject to a floor of 3, so if given something lower, we need to use at least 3?

    Thanks in advance for your help.

    Glen
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  2. Kader

    Kader New Member

    Hi Glen,
    I thinks this is just for scaling the VaR measure to the appropriate 99% confidence. If I am not wrong the charge from Basel is for market risk 99% confidence level and 10 day-horizon or 2 calendar week. Well for the multiplication factor I am also confused, it is said a minimum value of 3.
    Concerning Op-Risk a year-horizon and 99,9% confidence (just a reminder !). Hope I'm not wrong.:)
    Kader.
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  3. Kader

    Kader New Member

    But if it is given 2 for the multiplication, we'll just have to use it, I guess ! ;)
    • Like Like x 1
  4. crablegs

    crablegs Member

    Thank you Kader for taking the time to answer. I have to say that those capital requirements things are not my most comfortable zone..... your answer is very helpful. Thank you.
    • Like Like x 2
  5. Kader

    Kader New Member

    you are welcome !
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