Suppose that the economic capital for the two business units are as follows: Business Units 1...
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Suppose that the economic capital for the two business units are as follows: Business Units 1 Market Risk 50 Credit Risk 30 Operational Risk 20 The correlations are as in the following table: 2 10 50 60 MR-1 CR-1 OR-1 MR-2 CR-2 OR-2 MR-1 1.0 0.5 0.2 0.4 0.0 0.0 CR-1 0.5 1.0 0.2 0.0 0.6 0.0 OR-1 0.2 0.2 1.0 0.0 0.0 0.0 MR-2 0.4 0.0 0.0 1.0 0.5 0.2 CR-2 0.0 0.6 0.0 0.5 1.0 0.2 OR-2 0.0 0.0 0.0 0.2 0.2 1.0 MR,CR, and OR refer to market risk, credit risk, and operational risk; 1 and 2 refer to business unit. REQUIRED: (a) Calculate the total economic capital for Business Unit 1 and Business Unit 2. (4 marks) (b) Calculate the total economic capital for the two business units together. (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. Suppose that the economic capital for the two business units are as follows: Business Units 1 Market Risk 50 Credit Risk 30 Operational Risk 20 The correlations are as in the following table: 2 10 50 60 MR-1 CR-1 OR-1 MR-2 CR-2 OR-2 MR-1 1.0 0.5 0.2 0.4 0.0 0.0 CR-1 0.5 1.0 0.2 0.0 0.6 0.0 OR-1 0.2 0.2 1.0 0.0 0.0 0.0 MR-2 0.4 0.0 0.0 1.0 0.5 0.2 CR-2 0.0 0.6 0.0 0.5 1.0 0.2 OR-2 0.0 0.0 0.0 0.2 0.2 1.0 MR,CR, and OR refer to market risk, credit risk, and operational risk; 1 and 2 refer to business unit. REQUIRED: (a) Calculate the total economic capital for Business Unit 1 and Business Unit 2. (4 marks) (b) Calculate the total economic capital for the two business units together. (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.
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Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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