PART C [33 Marks] Question 1 [10 marks] Suppose that the economic capital for the two business units are as follows: Business Units 2 10 Market Risk Credit Risk Operational Risk MR-1 CR-1 OR-1 MR-2 The correlations are as in the following table: CR-1 OR-1 0.5 0.2 MR-1 1.0 1 50 30 20 1.0 0.2 0.0 50 60 MR-2 0.4 0.0 0.0 1.0 0.5 0.2 CR-2 0.0 0.5 0.2 0.2 1.0 0.4 0.0 CR-2 0.0 0.6 0.0 1.0 OR-2 0.0 0.0 0.0 0.2 MR, CR, and OR refer to market risk, credit risk, and operational risk; 1 and 2 refer to business unit. 0.6 0.0 0.5 OR-2 0.0 (b) Calculate the total economic capital for the two business units together. 0.0 0.0 0.2 0.2 1.0 REQUIRED: (a) Calculate the total economic capital for Business Unit 1 and Business Unit 2. (4 marks) (2 marks) (c) Calculate the incremental effect of each business unit on the total economic capital. Use this to allocate economic capital to business units. (4 marks) PART C [33 Marks] Question 1 [10 marks] Suppose that the economic capital for the two business units are as follows: Business Units 2 10 Market Risk Credit Risk Operational Risk MR-1 CR-1 OR-1 MR-2 The correlations are as in the following table: CR-1 OR-1 0.5 0.2 MR-1 1.0 1 50 30 20 1.0 0.2 0.0 50 60 MR-2 0.4 0.0 0.0 1.0 0.5 0.2 CR-2 0.0 0.5 0.2 0.2 1.0 0.4 0.0 CR-2 0.0 0.6 0.0 1.0 OR-2 0.0 0.0 0.0 0.2 MR, CR, and OR refer to market risk, credit risk, and operational risk; 1 and 2 refer to business unit. 0.6 0.0 0.5 OR-2 0.0 (b) Calculate the total economic capital for the two business units together. 0.0 0.0 0.2 0.2 1.0 REQUIRED: (a) Calculate the total economic capital for Business Unit 1 and Business Unit 2. (4 marks) (2 marks) (c) Calculate the incremental effect of each business unit on the total economic capital. Use this to allocate economic capital to business units. (4 marks)