Part 6 (Module 30 - 34): Q&A
C. Lau
September 26, 2016
Development Questions
Definition of: CRO, ART, COSO, AS/NZS 43600, ISO 3100
See Module 33 Section “Glossary”
Define volatility and its use in ERM
See Module 33 Section “Glossary”
Outline Basel II, SII and SOX
See Module 33 Section “Glossary”
Outline how a factor table approach maybe used to calculate a company’s capital
Break down a company’s business into a number of specific risk types
Record the amount of business activity for each risk types
Use models to calculate factors to be applied to a specific unit of each risk type
Tables can be tailored to an individual company or industry wide tables can be used
Factors and the units of risk exposure are multiplied together and summed to determine the net capital requirement
Allowance can be made for correlation between risk types if desired
How credit risk model maybe used to assess capital requirement
Estimate expected loss based on historical data from company with a certain credit ratings
Companies in the same industry are assumed to behave in the same way w.r.t. credit default over a given time period
Correlations between different industry types are allowed for separately
Merton Model can be used and evaluated the chance of default based on the level of debt in the company, the current share price and the volatility of the share price
Separate model is needed to model the actual loss and loss amount given default
Main use of an internal capital model
See Module 30 Section “Internal Capital Models”
Principle of the Merton Model
See Module 23 Section “Merton Model”
Marginal allocation approach
Gross just sum up the losses and net just include the diversification
Explain how the marginal approach may have been used to derive the figures
See Module 30 Section “Allocation by Marginal Capital Costs”
Explain how this information could be used by the company
Allocating capital to LoBs
Determining appropriate risk limits for each LoB
Calculating return on capital for each LoB
Formulating investment strategies for each LoB
Capital and use of internal model
Definitions of capital
See Module 30 Section “Definitions of Capital”
Use of internal capital model
See Module 30 Section “Internal Capital Models” \(\rightarrow\) “Use of internal CM”
Describe the behaviors that a company with an advanced ERM program would be expected to exhibit
See Module 31 Section “IAA Stages of ERM Maturity” links to the appendix
Description of a bunch of different risk
See Module 33 Section “Glossary”
Give an example of each of the above risk
See Module 33 Section “Glossary”