CAPITAL ALLOCATION AGAINST MARKET RISK
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management — Risk Management.
One-liners from this chapter
Free sample — 8 of 65 rapid-fire Q&A cards.
What is the primary purpose of capital allocation against market risk in banks?
Capital allocation against market risk ensures that banks hold sufficient capital to absorb potential losses arising from adverse movements in market prices such as interest rates, equity prices, foreign exchange rates, and commodity prices.
What is the net open position method used for in foreign exchange capital charge?
It aggregates all FX exposures to determine capital requirement.
Which RBI guideline governs the capital charge for market risk in Indian banks?
RBI's Master Circular on Basel III Capital Regulations and the associated guidelines on Minimum Capital Requirements for Market Risk govern the capital charge for market risk in Indian banks.
What is the minimum capital adequacy ratio banks must maintain against market risk under Basel III?
Banks must maintain a minimum 8% capital to risk-weighted assets ratio.
What are the two broad approaches prescribed under Basel II/III for computing market risk capital?
The two broad approaches are the Standardised Measurement Method (SMM) and the Internal Models Approach (IMA), where IMA uses Value at Risk (VaR) models subject to regulatory approval.
What is equity risk in the context of market risk capital computation?
Risk of loss from adverse movements in equity prices.
What does the Standardised Measurement Method use to calculate capital charge for interest rate risk?
The Standardised Measurement Method uses a maturity or duration-based framework that assigns risk weights to positions in different time bands and sums the resulting capital charges for specific risk and general market risk.
How is commodity risk treated under the Standardised Measurement Method?
A 15% capital charge is applied on net commodity positions.
Video classes for this chapter
CAPITAL ALLOCATION AGAINST MARKET RISK PART 1
CAPITAL ALLOCATION AGAINST MARKET RISK PART 2
CAPITAL ALLOCATION AGAINST MARKET RISK PART 3
CAPITAL ALLOCATION AGAINST MARKET RISK PART 4
CAPITAL ALLOCATION AGAINST MARKET RISK
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