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Answer: USD 4,557 million
**Correct Answer**: C **Explanation**: Under Basel II.5, the market risk capital requirement is calculated using both VaR and stressed VaR at the 99.0% confidence level with multiplication factors applied. The formula is: Market Risk Capital = max(VaR<sub>t-1</sub>, m<sub>c</sub> × VaR<sub>60-day Avg</sub>) + max(sVaR<sub>t-1</sub>, m<sub>s</sub> × sVaR<sub>60-day Avg</sub>) Where: - VaR<sub>t-1</sub> = Latest available 10-day VaR at 99.0% confidence level = 451 million - VaR<sub>60-day Avg</sub> = Average 10-day VaR of previous 60 days at 99.0% confidence level = 413 million - sVaR<sub>t-1</sub> = Latest available 10-day stressed VaR at 99.0% confidence level = 995 million - sVaR<sub>60-day Avg</sub> = Average 10-day stressed VaR of previous 60 days at 99.0% confidence level = 1,106 million - m<sub>c</sub> = multiplication factor for VaR = 3 - m<sub>s</sub> = multiplication factor for stressed VaR = 3 **Calculation**: - VaR component = max(451, 3 × 413) = max(451, 1,239) = 1,239 million - Stressed VaR component = max(995, 3 × 1,106) = max(995, 3,318) = 3,318 million - Total capital requirement = 1,239 + 3,318 = 4,557 million Therefore, the correct capital requirement is USD 4,557 million. **Key Points**: - Basel II.5 introduced stressed VaR to address limitations of traditional VaR during periods of market stress - The capital charge uses the higher of current VaR or scaled average VaR - The multiplication factor of 3 is applied to the average values - Only the 99.0% confidence level values are used for regulatory capital calculation
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A bank is using the VaR and stressed VaR market risk framework in line with the Basel II.5 guidelines. The bank's internal models for market risk have generated the following risk measures (in USD million) for the current trading book positions:
| Confidence level | Latest available 10-day VaR | Latest available 10-day stressed VaR | Average 10-day VaR of previous 60 days | Average 10-day stressed VaR of previous 60 days |
|---|---|---|---|---|
| 95.0% | 238 | 484 | 252 | 546 |
| 99.0% | 451 | 995 | 413 | 1,106 |
| 99.9% | 578 | 1,281 | 528 | 1,372 |
Assuming the supervisory authority has set the multiplication factors for both the VaR and the stressed VaR values to 3, what is the correct capital requirement for general market risk for the bank under Basel II.5?
A
USD 1,248 million
B
USD 1,533 million
C
USD 4,557 million
D
USD 4,799 million