The bank of ___ has adopted a new risk policy, which requires forward-looking risk assessments in addition to the measures that look at historical risk characteristics. Management has also become very focused on tail risk since the subprime crisis and is evaluating the banks capital allocation to certain higher-risk lines of business. You are asked to draft a section of the risk report that will address the risk measures adequacy for capital allocation decisions.

1. You decided to use the Normal Distribution Approach (parametric method). You find out the overall average of the risk to be analyzed is 2% with a standard deviation of 20% historically. What is the 1% VaR and 5% VaR? Use T-value of 2.32 and 1.64 accordingly.
2. You decided to compare multiple ways to calculate VaR (value at Risk). Explain the methods below and talk about the advantage and disadvantage of: Historical Simulation, Parametric (distribution) approach, and Monte Carlo simulation approach.