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1. Given that a bank calculates a one-year 95% VAR for market risk, a one-year 99% VAR for operational risk, and a one-year 99% VAR
1. Given that a bank calculates a one-year 95% VAR for market risk, a one-year 99% VAR for operational risk, and a one-year 99% VAR for credit risk. The measures are $100 million, $500 million, and $1 billion, respectively. Assume the bank uses building block approach and simply aggregates these three risks together. What is the best estimate of the bank's firmwide VAR at the 1% level? What are the disadvantages of the building block approach? [Total: 8 marks] 1. Given that a bank calculates a one-year 95% VAR for market risk, a one-year 99% VAR for operational risk, and a one-year 99% VAR for credit risk. The measures are $100 million, $500 million, and $1 billion, respectively. Assume the bank uses building block approach and simply aggregates these three risks together. What is the best estimate of the bank's firmwide VAR at the 1% level? What are the disadvantages of the building block approach? [Total: 8 marks]
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