C
Cheng
Member
Hi all!
I have more questions on Chapter 7 and hopefully someone can shed some light.
1) Section 1.1 says that capital allocation method should:
a) be consistent with the modelled capital for the whole business
(what does 'be consistent with the modelled capital' mean? can you provide an example of being consistent and inconsistent with the modelled capital?)
b) reflect the risk of individual business segments relative to one another and the business as a whole
c) reflect the interrelationship between risks and different business segments
(is this suggesting that the capital allocation method should allow for correlation and diversification benefit? how is c) different from b) ?)
2) Since expected policyholder default gives the expected loss beyond a threshold, why does the formula in computing EPD includes P(X>=b)?
i.e. formula given: EPD = P(X>=b)* E[(X-b)|X>=b], shouldn't it be
EPD = E[(X-b)|X>=b]?
3) I don't really understand co-measures in allocating capital, e.g. how it differs from other methods or what it implies. The notes seem to suggest that it's done using simulations while other allocation methods is based on mathematical formula..
a) Also, is co-measures a subset of proportional method where the risk measures are based upon conditional expectations? Hence, why is co-variance E[(Xi-ui)(X-u)] a co-measure when it's not based on conditional expectations? Is co-variance different from covariance?
b) how is co-TVaR differ from T-VaR and co X T-VaR differ from X T-VaR?
c) the formula for co-EPD seems to be rather different as compared to EPD..
Hope someone can help me with this. Material in this chapter is making me confused and I'm getting worried since the 'specimen Sept 2013 paper' has a big question on capital, according to the other post.
Thanks in advance!
I have more questions on Chapter 7 and hopefully someone can shed some light.
1) Section 1.1 says that capital allocation method should:
a) be consistent with the modelled capital for the whole business
(what does 'be consistent with the modelled capital' mean? can you provide an example of being consistent and inconsistent with the modelled capital?)
b) reflect the risk of individual business segments relative to one another and the business as a whole
c) reflect the interrelationship between risks and different business segments
(is this suggesting that the capital allocation method should allow for correlation and diversification benefit? how is c) different from b) ?)
2) Since expected policyholder default gives the expected loss beyond a threshold, why does the formula in computing EPD includes P(X>=b)?
i.e. formula given: EPD = P(X>=b)* E[(X-b)|X>=b], shouldn't it be
EPD = E[(X-b)|X>=b]?
3) I don't really understand co-measures in allocating capital, e.g. how it differs from other methods or what it implies. The notes seem to suggest that it's done using simulations while other allocation methods is based on mathematical formula..
a) Also, is co-measures a subset of proportional method where the risk measures are based upon conditional expectations? Hence, why is co-variance E[(Xi-ui)(X-u)] a co-measure when it's not based on conditional expectations? Is co-variance different from covariance?
b) how is co-TVaR differ from T-VaR and co X T-VaR differ from X T-VaR?
c) the formula for co-EPD seems to be rather different as compared to EPD..
Hope someone can help me with this. Material in this chapter is making me confused and I'm getting worried since the 'specimen Sept 2013 paper' has a big question on capital, according to the other post.
Thanks in advance!