Question

Suppose the FI's portfolio VaR over the previous 60 days was $10 million and stressed VaR over the previous 60 days was $25 million using the 1 percent worst case (or 99th percentile). The minimum holding period is 10 days. What is the minimum capital charge?

Answer 1

To determine the minimum capital charge for a financial institution, the higher of the two VaR measures (regular VaR or Stressed VaR) adjusted for the holding period is used. In this case, the minimum capital charge would be based on the Stressed VaR over the previous 60 days.

Step-by-step explanation:

The question relates to calculating the minimum capital charge for a financial institution (FI) based on their Value at Risk (VaR) and Stressed VaR figures. Considering the FI's portfolio VaR of $10 million and a Stressed VaR of $25 million at the 99th percentile for the prior 60 days and a minimum holding period of 10 days, the minimum capital charge would correspond to the higher of the two VaR measures after adjusting for the holding period. Financial regulators typically require this calculation to ensure that FIs hold enough capital to cover potential losses from their portfolio over the specified period.