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P2.T7.410. Basel III market risk, continued

Nicole Seaman

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AIMs: Explain and calculate the stressed value-at-risk measure and the frequency which it must be calculated. Explain and calculate the market risk capital requirement. Describe the qualitative disclosures for the incremental risk capital charge. Describe the quantitative disclosures for trading portfolios under the internal models approach. Describe the regulatory guidance on prudent valuation of illiquid positions.

Questions:

410.1. As a risk manager for FlexCity Bank, Betty is asked to calculate the market risk capital requirement for the bank's trading book. According to her reports:
  • The 95.0%, one-day value at risk (VaR) of the last trading day is USD 65,000
  • The average 95.0%, one-day VaR for the last 60 trading days is USD 27,000
  • The 95.0%, one-day stressed value (sVaR) at risk (VaR) of the last trading day is USD 205,000
  • The average 95.0%, one-day stressed VaR (sVaR) for the last 60 trading days is USD 85,000
Both multiplication factors, m(c) and m(s), are set at the minimum of 3.0. She assumes the return of the bank's trading portfolio is normally distributed. Which is nearest to the market capital requirement?

a. USD 336,000
b. USD 362,270
c. USD 1.14 million
d. USD 1.50 million


410.2. Which of the following statements is true about the stressed value at risk (sVaR) measure?

a. Banks can elect to use the greater of their stressed VaR or their regular market risk VaR; i.e., max{VaR, sVaR}
b. Stressed VaR is structurally identical to the Basel's regular market risk VaR except it must be based on a 20-day, 99.99% percentile, one-tailed confidence interval
c. Stressed VaR is structurally identical to the Basel's regular market risk VaR except its model inputs must be calibrated to historical data from a continuous 12-month period of significant financial stress relevant to the bank’s portfolio
d. Banks are required to add a "plus up," which ranges from zero to one, to the multiplication factor, m(s), based on results of the backtest of the stressed VaR model


410.3. Which of the following statements is true about the incremental risk capital charge (IRC)?

a. The IRC requirement is eliminated in Basel III because its risks are redundant to (subsumed by) risks in the new comprehensive risk measure
b. The IRC captures default and migration risk for unsecuritized credit products held in the trading book at a 99.9% confidence level over a one-year horizon
c. The IRC captures the risk of losses on market risk exposures caused by factors other than broad market movements, including event risk and idiosyncratic risk
d. The IRC captures price risks for correlation trading positions--i.e., certain securitizations and their hedges--at a 99.9% confidence level over a one-year horizon

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