In its trading portfolio, an FI holds 10,000 Exxon Mobil (XOM) shares at a share price of $86.50 and has sold 5,000 General Electric (GE) shares under a forward contract that matures in one year. The current share price for GE is $20.50. The shift risk factor (i.e., standard deviation) for level 1 risk factor is 4 percent, for level II risk factor is 6 percent, for level III long positions is 9 percent, for level III short positions is -9 percent, and for non-hedgeable risk is 1 percent. Using the risk factors listed in Table 15-8, calculate the market risk capital charge on these securities.
Step 1. Assign each instrument to applicable risk factors
Step 2. Determine the size of the net risk position in each risk factor
Step 3. Aggregate overall risk position across risk factors