-How confident does the firm want to be in their ability to withstand losses ofsome predetermined level?•In taking these steps, the firm is then able to come up with a dollar value forCVaR and that dollar value is the economic capital of the firmAdditional explanation
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•Time horizon: allows firms to determine how bad losses can be, sincegenerally, the longer the time period, the larger the loss. Default probabilityalso increases with time•Loss distribution: calculation of a loss distributions shows the probability oflosses occurring and the size of these losses. allows the confidence level to beapplied.•Confidence level: in choosing the confidence level that the firm wants to beable to withstand large losses, the firm can then put a value to CVaR. Relatedto firms risk appetite and also credit rating.2ndpresenter8.5: What is the difference between economic and regulatory capital?•Economic capital:- buffer for unexpected losses, not expected to be spent- the amount of economic capital needs to be significant, greater risk intransactions require more capital- is an amount internally set by management•Regulatory- capital requirement set by regulators based on their views of the entity’s risktaken- set to protect the public’s deposits- based on a formulaic approach that may miss finer details of the entity’soperations that affect its risk profile8.6: How is default risk different from credit risk?
Credit rating, Risk in finance, Operational risk, Value at risk
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