The basic idea was simple enough; to determine whether the cost of the risk management strategy was outweighed by the consequent reduction in capital. Perhaps you're confused by the apparently sketchy detail provided in the question and by the definition of the term “capital requirement”.
The Core Reading for Subject ST7 refers to the “capital requirement” as a nominal amount. In this context however, it refers to the cost of capital.
Therefore the cost of holding capital (in absolute terms) is:
Capital charge (£) = capital held x cost of capital (%)
If the risk management strategy is not introduced, the opportunity cost of holding capital (ie the capital charge) is:
capital held x cost of capital (%)
=(750+500+750-300)x15%=255m
If the strategy is introduced, the capital charge is:
capital held x cost of capital (%)
=(750+500+750-300)x0.70x15%=178.5m
Hence there is a saving of 255 -178.5 = £76.5m for a cost of £50m and the strategy should be introduced.
Alternatively, think about it this way: The release in capital will be:
(750+750+500-300)x0.3 = 510m
so the reduction in capital charge will be 510x0.15=76.5m . Hence as above, the reduction in capital charge exceeds the £50m cost of the strategy.
