:Question 1: Using the Basel II Internal Ratings Based (IRB) formula for corporate exposures, describe each of the key input variables and their impact on regulatory capital and risk-weighted assets (RWA)?

Question 2: Beyond the regulatory requirement to maintain adequate capital reserves, what other goals does Basel II/III strive to achieve? Discuss in terms of impact on regulatory capital calculations (credit risk only) and an ADI's risk management culture.

Question 3: Consider a $300m portfolio comprising 50 unsecured corporate loans. Assuming individual exposures default with probability 3% and LGD=25% and EAD=100%

a) Derive the mean and standard deviation of portfolio loss assuming loans default independently?

b) Construct the portfolio loss distribution [Hint: use a normal distribution]

c) Derive portfolio VaR and economic capital at the 99th percentile level

Question 4: Repeat 3 assuming a uniform joint default probability of 0.2%. What is the impact on portfolio risk as a result of correlation?

Question 5: Define the key differences between regulatory and economic capital modeling methodologies?

Question 6: Unlike regulatory capital, economic capital models generally apply a portfolio-based approach to credit risk management. Explain.