Answer-first summary for fast verification
Answer: I and II
## Explanation Let's analyze each statement: **Statement I: Correct** - The IRC model indeed measures losses due to default and migration (credit rating changes) over a one-year horizon at a 99% confidence level for all IRC-covered positions. **Statement II: Correct** - Banks are allowed to incorporate securitization positions that hedge underlying credit instruments held in the trading account into their IRC models. **Statement III: Incorrect** - The IRC requires a 99% confidence level, not 99.9%. The 99.9% confidence level is used for credit risk in the banking book under Basel II, not for the IRC in the trading book. Therefore, only statements I and II are correct, making option A the correct answer.
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In the latest guidelines for computing capital for incremental risk in the trading book, the incremental risk charge (IRC) addresses a number of perceived shortcomings in the 99%/10-day VaR framework. Which of the following statements about the IRC is/are correct?
I. For all IRC-covered positions, the IRC model must measure losses due to default and migration over a one-year horizon at a 99% confidence level.
II. A bank can incorporate into its IRC model any securitization positions that hedge underlying credit instruments held in the trading account.
III. The IRC requires banks to calculate a one-year 99.9% VaR for losses from credit-sensitive products in the trading book taking both credit rating changes and defaults into account.
A
I and II
B
III
C
I, II, and III
D
II and III
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