a) Value at Risk – I don’t think you have addressed the question by discussing about the need and uses of the model. Why people should choose VaR model (ROLES, USAGE, ADVANTAGE) and not how should they calculate. The discussion below is more towards the introduction of VAR and how to use the model. I think the compositions of the VaR should be discussed in question 3, as it talks about the features and the uses in practice. http://people.stern.nyu.edu/adamodar/pdfiles/papers/VAR.pdf OR http://ferrari.dmat.fct.unl.pt/personal/mle/GestaoRisco/AcordoBasileia/CredRiskMod.pdf Try looking at these websites.
-(EXAMPLE FOR Q1) value at risk (VaR) methods used in allocating economic capital against market risks. Specifically, the economic capital for credit risk is determined so that the estimated probability of unexpected credit loss exhausting economic capital is less than some target insolvency rate.
Capital allocation systems generally assume that it is the role of reserving policies to cover expected credit losses, while it is that of economic capital to cover unexpected credit losses. Thus, required economic capital is the additional amount of capital necessary to achieve the target insolvency rate, over and above that needed for coverage of expected losses.
Value at Risk (VaR) is used to measure the potential loss in the value of a risky portfolio over a defined period for a given confidence interval. With BIS 1998 in place, certain banks developed credit value-at-risk models under two main categories during the late 1990s. The first type of credit VaR models is the default mode models (DM) in which the credit risk is linked to the default risk.
Value-at-risk (VaR) methods used in allocating economic capital