Problem:
Suppose that daily gains (losses) are normally distributed with a standard deviation of 5 million.
Required:
Question 1: Estimate the minimum regulatory capital the bank is required to hold. (assume a multiplicative factor of 4.0)
Question 2: Estimate the economic capital using a one year time horizon and a 99.9% confidence level assuming that there is a correlation of 0.05 between gains (losses) on successive days.
Note: Be sure to show how you arrived at your answer.