Financial Risk Manager Part 2

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Explanation:

Under the Basel 2.5 framework, the total market risk capital charge for a trading portfolio incorporates both the regular Value-at-Risk (VaR) and the Stressed Value-at-Risk (SVaR).

The capital charge formula is defined as: Total Capital Charge = $Max(VaR_{t-1}, m_r \times VaR_{avg}) + Max(SVaR_{t-1}, m_s \times SVaR_{avg})$

1. Calculate the standard VaR component: $Max(\`$ 1,200,000, 3 \times \ $1`,400,000) = Max(\`$ 1,200,000, \ $4`,200,000) = \`$ 4`,200,000$

2. Calculate the Stressed VaR component: $Max(\`$ 2,200,000, 3 \times \ $2`,000,000) = Max(\`$ 2,200,000, \ $6`,000,000) = \`$ 6`,000,000$

3. Calculate the Total Market Risk Capital Charge: Total Capital Charge = $\`$ 4,200,000 + \ $6`,000,000 = \`$ 10`,200,000$

Thus, the correct answer is Option A.

Explanation:

Under the Basel 2.5 framework, the total market risk capital charge for a trading portfolio incorporates both the regular Value-at-Risk (VaR) and the Stressed Value-at-Risk (SVaR).

The capital charge formula is defined as: Total Capital Charge = $Max(VaR_{t-1}, m_r \times VaR_{avg}) + Max(SVaR_{t-1}, m_s \times SVaR_{avg})$

1. Calculate the standard VaR component: $Max(\`$ 1,200,000, 3 \times \ $1`,400,000) = Max(\`$ 1,200,000, \ $4`,200,000) = \`$ 4`,200,000$

2. Calculate the Stressed VaR component: $Max(\`$ 2,200,000, 3 \times \ $2`,000,000) = Max(\`$ 2,200,000, \ $6`,000,000) = \`$ 6`,000,000$

3. Calculate the Total Market Risk Capital Charge: Total Capital Charge = $\`$ 4,200,000 + \ $6`,000,000 = \`$ 10`,200,000$

Thus, the correct answer is Option A.

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Q.20 A financial institution has a trading portfolio with the following characteristics:

Previous day's VaR ( $VaR_{t-1}$ ): `$1`,200,000 (10-day time horizon, 99% confidence level)

Average VaR over the past 60 days ( $VaR_{avg}$ ): `$1`,400,000 (10-day time horizon, 99% confidence level)

Previous day's Stressed VaR ( $SVaR_{t-1}$ ): `$2`,200,000 (10-day time horizon, 99% confidence level)

Average Stressed VaR over the past 60 days ( $SVaR_{avg}$ ): `$2`,000,000 (10-day time horizon, 99% confidence level)

Multiplicative factor for VaR ( $m_r$ ): 3

Stressed VaR multiplicative factor ( $m_s$ ): 3

Calculate the total market risk capital charge based on the Basel 2.5 framework.

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Last updated: July 5, 2026 at 08:32

$10,200,000

$9,200,000

$5,000,000

$4,987,000