Exercise 2.

Returns

1 -3.023015 -3.023015 Ranges Bin Frequency Rel Freq

24 -2.599409 [-4, -3.5] -3.5 0 0
65 -2.374363 [-3.5, -3] -3 1 0.01
25 -2.36927 [-3, -2.5] -2.5 1 0.01
16 -2.170491 [-2.5, -2] -2 3 0.03
60 -1.981934 [-2, -1.5] -1.5 4 0.04
64 -1.587364 [-1.5, -1] -1 7 0.07
35 -1.580124 [-1, -0.5] -0.5 15 0.15
98 -1.525723 [-0.5, 0] 0 18 0.18
17 -1.332164 [0, 0.5] 0.5 21 0.21
62 -1.32477 [0.5, 1] 1 17 0.17
80 -1.23573 [1, 1.5] 1.5 7 0.07
23 -1.179583 [1.5, 2] 2 2 0.02
46 -1.069873 [2, 2.5] 2.5 2 0.02
19 -1.048029 [2.5, 3] 3 1 0.01
87 -1.029787 [3, 3.5] 3.5 1 0.01
20 -0.970499 More 0
31 -0.969153
95 -0.9582
11 -0.938055 0.25
3 -0.865784
74 -0.822631 0.2
50 -0.807806
88 -0.755067 0.15
48 -0.721411
57 -0.624307 0.1
68 -0.604076
67 -0.595103 0.05
58 -0.532237
40 -0.5188 0
15 -0.512945
[-3.5, -3]

[-3, -2.5]

[-2, -1.5]

[-1.5, -1]

[-0.5, 0]

[0.5, 1]

[1, 1.5]
[-4, -3.5]

[-2.5, -2]

[-1, -0.5]

[0, 0.5]
94 -0.397333
7 -0.384534
34 -0.379596
86 -0.354881
18 -0.346583
61 -0.316356
26 -0.311053
82 -0.29176
56 -0.272971
89 -0.188727
22 -0.136552
33 -0.123669
77 -0.105572
47 -0.095192
76 -0.079144
 6 -0.050472
73 -0.037761
97 -0.020311
100 0.012049
14 0.033933
91 0.042891
39 0.04986
27 0.079451
45 0.098805
2 0.160065
28 0.179391
85 0.182501
5 0.214725
69 0.222169
81 0.250884
29 0.257916
30 0.271939
36 0.27329
84 0.276626
55 0.283229
96 0.405126
32 0.420789
63 0.4599
70 0.499207
99 0.523708
13 0.554851
72 0.60224
42 0.60279
83 0.628029
75 0.654907
79 0.657088
10 0.663844
93 0.679372
51 0.771033
37 0.78345
38 0.850966
90 0.851956
4 0.873265
9 0.926243
71 0.984687
59 0.995051
52 1.009589
12 1.075584
49 1.090436
41 1.155088
8 1.258877
66 1.396979
44 1.444623
78 1.636727
43 1.704975
21 2.274264
92 2.325978
53 2.726083
54 3.427267
 Losses exceed 1 with frequency 0.16
Losses exceed 1.5 with frequency 0.09
Losses exceed 2 with frequency 0.05
Losses exceed 2.5 with frequency 0.02

The loss that is exceeded with

5% frequency has a value of 2

Bear in mind that when losses are positive

returns are negative !
[-0.5, 0]

[0.5, 1]

[1, 1.5]

[2, 2.5]
[-1, -0.5]

[0, 0.5]

[1.5, 2]

[2.5, 3]

[3, 3.5]
Ex. 2.4

Ex. 2.5
Risk Weights under the Standardised Approach in Basel II
Rating Sovereign Banks Banks Corporates
(Option 1) (Option 2)
AAA 0 0.2 0.2 0.2
AA+ 0 0.2 0.2 0.2
AA 0 0.2 0.2 0.2
AA- 0 0.2 0.2 0.2
A+ 0.2 0.5 0.5 0.5
A 0.2 0.5 0.5 0.5
A- 0.2 0.5 0.5 0.5
BBB+ 0.5 1 0.5 1
BBB 0.5 1 0.5 1
BBB- 0.5 1 0.5 1
BB+ 1 1 1 1
BB 1 1 1 1
BB- 1 1 1 1
B+ 1 1 1 1.5
B 1 1 1 1.5
B- 1 1 1 1.5
<B- 1.5 1.5 1.5 1.5
Unrated 1 1 0.5 1
Basel 1
Amount m$ Risk weight Amount x
Debtor Risk weight
OECD Banks (A rated) 100 20% 20
Private Oil firms (AAA rated) 100 100% 100
Private Car firms (BBB rated) 100 100% 100
OECD Central Governments (rated BBB) 100 0% 0
Commitment to OECD bank (BBB rated) - drawn 40 20% 8
Commitment to OECD bank (BBB rated) - undrawn 30 20% 6
Capital requirement 18.72

Basel 2 - Standardised Approach

Amount m$ Risk weight Amount x
Debtor Risk weight
OECD Banks (A rated) 100 50% 50
Private Oil firms (AAA rated) 100 20% 20
Private Car firms (BBB rated) 100 100% 100
OECD Central Governments (rated BBB) 100 50% 50
Commitment to OECD bank (BBB rated) - drawn 40 50% 20 option 2
Commitment to OECD bank (BBB rated) - undrawn 30 50% 15 option 2
Capital requirement 20.4
Ex. 2.6

PD R PD(down) LGD* ELD EL b(PD) M

0.01 0.192783679 0.14027268 0.45 0.063123 0.0045 0.137486 3

B) Capital as a function of Loss Given Default

LGD K
0.84 K as a function of LGD
0.10 0.19
0.15 0.28 2.00
0.20 0.37 1.80
0.25 0.46
1.60
0.30 0.56
1.40
0.35 0.65
1.20
K

0.40 0.74
1.00
0.45 0.84
0.50 0.93 0.80
0.55 1.02 0.60
0.60 1.12 0.40
0.65 1.21 0.20
0.70 1.30 0.00
0.75 1.39 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95
0.80 1.49 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 1
0.85 1.58 LGD
0.90 1.67
0.95 1.77
1.00 1.86

C) Capital as a function of Probability of Default

PD K
0.84
0.05 1.32 K as a function of PD
0.1 1.69
0.15 1.93 2.50
0.2 2.06
0.25 2.13 2.00
0.3 2.15
0.35 2.12 1.50
K

0.4 2.06
0.45 1.98 1.00
0.5 1.87
0.55 1.74 0.50
0.6 1.60
0.65 1.44 0.00
0.7 1.27
05 0.1 .15 0.2 .25 0.3 .35 0.4 .45 0.5 .55 0.6 .65 0.7 .75 0.8
0.75 1.08 0. 0 0 0 0 0 0 0 0
PD
 0.50

0.00
05 0.1 .15 0.2 .25 0.3 .35 0.4 .45 0.5 .55 0.6 .65 0.7 .75 0.8
0. 0 0 0 0 0 0 0 0
0.8 0.88 PD
0.85 0.68
0.9 0.46

D) Capital as a function of Maturity

K as a function of M
M K
1.20
0.84
0.5 0.57 1.00
1 0.62
1.5 0.68 0.80

K
2 0.73
2.5 0.78 0.60
3 0.84
3.5 0.89 0.40
4 0.94
0.20
4.5 1.00
5 1.05 0.00
0.5 1 1.5 2 2.5 3 3.5 4
M

E) Relationship between PD and MA

PD R PD(down) LGD* ELD EL b(PD) M

0.01 0.192783679 0.14027268 0.45 0.063123 0.0045 0.137486 1

PD R PD(down) LGD* ELD EL b(PD) M

0.01 0.192783679 0.14027268 0.45 0.063123 0.0045 0.137486 2

PD MA (M=2)
1.173
0.01 1.173
0.05 1.091 MA as a function of PD
0.1 1.066
1.200
0.15 1.053
0.2 1.046 1.150
0.25 1.040 1.100
MA

0.3 1.036
0.35 1.032 1.050
0.4 1.030 1.000
0.45 1.027
0.5 1.025 0.950
0.900
01 05 0.1 .15 0.2 .25 0.3 .35 0.4 .45 0.5 .55 0.6 .65 0.7
0. 0. 0 0 0 0 0 0

PD
 1.100

MA
1.050
1.000
0.950
0.55 1.024 0.900
0.6 1.022
01 05 0.1 .15 0.2 .25 0.3 .35 0.4 .45 0.5 .55 0.6 .65 0.7
0.65 1.021 0. 0. 0 0 0 0 0 0
0.7 1.020
PD

MA as a function of M
for different PDs
1.80
1.60
1.40

MA
1.20
1.00
0.80
PD =
0.60 1%
0.40
0.20
0.00
1
1.25

2
2.25
2.5

3.75
4

4.75
5
1.5
1.75

2.75

3.25
3.5

4.25
4.5
M
 Regulatory
Capital
MA UL EAD (mn$) RWA K
1.346413 0.07893 10 9.8663 0.8367

f LGD

60 65 70 75 80 85 90 95 00
0. 0. 0. 0. 0. 0. 0. 0. 1.
D

on of PD

5 5 5 6 5 7 5 8 5 9
0. 0.5 0. 0.6 0. 0.7 0. 0.8 0.
PD
5 5 5 6 5 7 5 8 5 9
0. 0.5 0. 0.6 0. 0.7 0. 0.8 0.
PD

nction of M

2.5 3 3.5 4 4.5 5

M

Regulatory
Capital
MA UL EAD (mn$) RWA K
1 0.058623 10 7.3278 0.6214

Regulatory
Capital
MA UL EAD (mn$) RWA K
1.173206 0.068777 10 8.5971 0.7290

M MA (PD=1%) MA (PD=2%)

1 1.00 1.00
n of PD 1.25 1.04 1.03
1.5 1.09 1.07
1.75 1.13 1.10
2 1.17 1.13
2.25 1.22 1.17
2.5 1.26 1.20
2.75 1.30 1.23
3 1.35 1.27
3.25 1.39 1.30
3.5 1.43 1.33

45 0.5 .55 0.6 .65 0.7

0 0
 3.75 1.48 1.37
4 1.52 1.40
45 0.5 .55 0.6 .65 0.7 4.25 1.56 1.43
0 0
4.5 1.61 1.46
4.75 1.65 1.50
5 1.69 1.53

n of M
PDs

PD =
1%
3.75
4

4.75
5
4.25
4.5
 Ex. 2.7

Debtor PD R PD(down) LGD*

OECD Banks (A rated) 0.5% 0.213456 9.8% 0.5
Private Oil firms (AAA rated) 0.1% 0.234148 3.4% 0.5
Private Car firms (BBB rated) 1.0% 0.192784 14.0% 0.5
OECD Central Governments (rated BBB) 1.0% 0.192784 14.0% 0.5
Commitment to OECD (BBB) bank 1.00% 0.192784 14.0% 0.5

Here we are assuming that all corporate borrowers in the p

have annual sales above 50m euros. This means that thei
adjustment in the correlation formula is zero. (The size adj
always zero for banks and sovereigns).
 Ex. 2.7

ELD EL b(PD) M MA UL EAD (mn$) RWA K

0.048869 0.0025 0.167086 5 1.891875 0.087724 100 109.6552 9.2988
0.017096 0.0005 0.246936 5 2.568856 0.042632 100 53.2896 4.5190
0.070136 0.005 0.137486 5 1.692825 0.110264 100 137.8306 11.6880
0.070136 0.005 0.137486 5 1.692825 0.110264 100 137.8306 11.6880
0.070136 0.005 0.137486 5 1.692825 0.110264 70 96.4814 8.1816

that all corporate borrowers in the portfolio K with IRB approach (Basel 2) : 45.38
ve 50m euros. This means that their size K with Standardised Approach (Basel 2) 20.40
lation formula is zero. (The size adjustment is K with Basel 1 18.72
and sovereigns).
Solution to Ex. 2.8

Yesterday's Mean VaR F SRC SRC MRC

VaR over past with IMA with SA
60 days Comments
20 10 3 2 3 32 market shock
28 10 3 2 3 32 larger market shock
36 10 3 2 3 38 very large market shock
10 10 3.75 2 3 39.5 IMA inaccurate
10 10 3 1 3 31.5 SRC with IMA too low