Description
This request requires extensive risk management knowledge especially in relation to the fundamental review of the trading book. The work consists of analyzing an excel file and calculating various elements as indicated. Please accept this request only if you are familiar with these concepts, as you wont find the answers online and you have to conduct the calculus yourself (you need to present how you reached the final answers).
Request: You are a risk manager in very simple bank. All you trade is SPX index positions and WTI. You are tasked with assessing the impact of the new FRTB capital rules on your trading book. We have provided historical data on these assets. Your job is to compute the impact of the change in risk model and to explain these to your managers.
1)Study the 3 attachments as well as Hull Chapter 18. Note that equation 18.1 is missing a square root on the output of the formula.
2)Briefly summarize the main changes, at a high level, between Basel 2.5 and FRTB. What do you think are the regulators motivation for the changes?
3)Use the attached spreadsheet: FRTB Data, to perform the Following Calculations
-Assume $1mm of SPX and $2mm of WTI as your position
-Note that SPX is a 10 day liquidity asset and WTI is a 20 day asset for the internal model
-Equity risk weight for standard model is 55% (for SPX), commodity risk weight is 35% (for this commodity)
-Capital calculations:
O old VaR
O old stressed VaR
O old capital charge (Basel 2.5)
O stressed ES of both assets combined
O stressed ES WTI
O liquidity adjusted ES (new capital charge)
O standardized equity risk charge
O standardized commodity risk charge
O standardized risk charge for portfolio
O floor of standard charge to be compared to internal model (72.5% long term)
4)Answer the questions below. Please note that in this study we are not considering charges for default. I.e. we are not looking at the replacements for specific risk and IRC charges.
Questions to Answer:
1. The FRTB standard model looks a lot like a VaR model but with 3 sets of fixed correlations within risk classes to obtain the risk charge for each risk class. The total (delta) risk charge for all risk classes is the sum of the risk charges for each risk class. Why do you think the regulators decided to add risk charges across risk classes assuming 100% correlation?
2. The floor for the standard model is going to be 72.5%. that means that using an internal model can’t save more than 27.5% capital. What implication do you think this has for adoption of the internal models? Note that in our example we only used 10 and 20 day liquidity assets. The assets with longer liquidity periods get much higher charges.
3. Does the complexity of the model and the arbitrary set of risk factors make it difficult or easy to manage a business using these capital models to measure risk. Why?
4. From a risk management perspective, briefly discuss the merits of using ES instead of VaR.
POST 1
Hei there,I reviewed your work, overall it looks great. There is only one thing which is incomplete. The word document which contains the answer is too short. As indicated in the guideline, the work will be presented orally and needs to have enough words so the student can present it in 8-10 minutes (that would mean a minimum of 1000 words). Yet your answers are in total 244 words. This is mentioned in the guideline file provided, on the last page “The presentations are to be 8-10 minutes long”Everything else looks great, for the updated version I will only please you to extend on the ideas presented so we can meet the minimum of 8 minutes speech (that would be a minimum of 1000 words for the word document)Thanks once again for the great work.
POST 2
Hello.I was going through the assignment once more but i think to the best of my knowledge, there really isn’t anything to add. This is because everything else ties back to calculations in the excel that should be presented in class. And if everything is written, you may read without explanation making the work not original. Besides, if we write much, panel which you will be presenting the work to might regard it as junk. Kindly lemmi know if you have any reservations we see what can be done.Thanks again
POST 3
I do understand you reluctance towards adding more information as it would be categorized as junk info, and I do understand your concept that a part of the answer is actually included in the excel file, yet the excel document should serve only for our usage when doing the calculus. This mean that if the word document refers to anything from the excel file, it should be mention also in the word document and explained. I do understand that adding more information to question 1 and 2 which are directly related to the calculus might not bring many benefits, yet for question 3 and question 4 further infos could be added including generalities.For example in question 3 you answered that indeed the complexity of the model and the abritray set of risk factors make it easier to manage a business using these capitals models when it comes to measuring risks. Yet you did not explain why it does so. The answers should not be under the form of yes/no, it should provide the answer to the question and dive in the subject explaining why is that.
