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CMA Final · Risk Management in Banking and Insurance · Market Risk Management

A bank's market risk capital charge under the Basel framework's internal models approach for the trading book (Basel 2.5 / Basel II.5 style) relied on a 10-day 99% VaR. If the average of the last 60 days' VaR is Rs 50 crore, the latest day's VaR is Rs 46 crore and the multiplication factor is 3.5, the VaR-based charge is the higher of the latest VaR and multiplier times average VaR. What is the VaR-based charge?

The charge is Rs 175 crore. The rule takes the higher of the previous day's VaR and the multiplication factor times the 60-day average VaR; 3.5 x 50 = 175, which exceeds the latest VaR of Rs 46 crore.

  1. ARs 175 croreCorrect
  2. BRs 46 crore
  3. CRs 161 crore
  4. DRs 96 crore

Explanation

Charge = max(latest VaR, multiplier x average VaR) = max(46, 3.5 x 50) = max(46, 175) = Rs 175 crore. Rs 46 crore ignores the multiplier and average. Rs 161 crore applies the multiplier to the latest VaR (3.5 x 46). Rs 96 crore adds the two figures.

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