Mathematical derivation of FRTB SA framework for market risk capital requirements
Mathematical derivation of FRTB SA framework for market risk capital requirements
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Mr Frog · External communityPost link
External question — Quantitative Finance Stack Exchange
Author: Mr Frog
Original post: https://quant.stackexchange.com/questions/85837
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
Adaptation: HTML converted to plain text; contact email addresses removed.
I want to understand what exactly Fundamental Review of the Trading Book (FRTB) Standardized Approach (SA) is calculating and how.
My current understanding of the Sensitivities-Based Method (SBM) is that we start from a certain expansion of the profit and loss (first order in the risk factor via delta, higher orders in the risk factor via curvature revaluation, and first order in volatility) and calculate its volatility using a set of prescribed variances for our instruments, given by the risk weights, so as to automatically obtain the Gaussian expected shortfall. Is my intuition correct? I couldn't see it very clearly just by reading pages and pages of textual regulations. I would like to see its mathematical derivation/outline or obtain it.
Do you believe it is feasible to derive? Is there any extensive source out there that can be used (books, articles, notes)?
What about the intuition behind the other components (Default Risk Charge - DRC, Residual Risk Add-On (RRAO)? Is there any source for those too?
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Quoted from Forex.com.bd-Editorial External question — Quantitative Finance Stack Exchange Author: Mr Frog Source score (net votes, not local likes): 0 Original post: https://quant.stackexchange.com/questions/85837 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I want to understand what exactly Fundamental Review of the Trading Book (FRTB) Standardized Approach (SA) is calculating and how. My current understanding of the Sensitivities-Based Method (SBM) is that we start from a certain expansion of the profit and loss (first order in the risk factor via delta, higher orders in the risk factor via curvature revaluation, and first order in volatility) and calculate its volatility using a set of prescribed variances for our instruments, given by the risk weights, so as to automatically obtain the Gaussian expected shortfall. Is my intuition correct? I couldn't see it very clearly just by reading pages and pages of textual regulations. I would like to see its mathematical derivation/outline or obtain it. Do you believe it is feasible to derive? Is there any extensive source out there that can be used (books, articles, notes)? What about the intuition behind the other components (Default Risk Charge - DRC, Residual Risk Add-On (RRAO)? Is there any source for those too?
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