I have a doubt in the calculation of capital requirement in September 12, Q3, part ii. This relates to Approach II as defined in the question As per my understanding, the capital requirement in this case should be the 99.5th percentile value less the mean So for example, for company Cornwall Insurance, capital requirement would be 82,852 - 20,000 = 62,852 The cost of capital of 6% should then be applied to the capital requirement of 62,852 But exam solution considers a capital requirement as 82,852 (99.5th percentile value) Am I missing something here? Would appreciate an early response as exam is approaching soon. Thanks in advance!
Hi Albina, A Value at Risk can be derived by a number of different methods (e.g. empirical, parametric, stochastic) and be expressed in a number of different ways (e.g. absolute or relative). Comments relating to the latter issue appear on page 15 of Module 14 of the ActEd Course Notes. Here the examiners have adopted an 'absolute' approach, whereas you have adopted a 'relative' approach. I think that the question is ambiguous in this respect, and I hope that if you had presented your approach then it would have been accepted. Best wishes David
