ABSTRACT
INTRODUCTION A risk-based capital model uses risk measures to estimate the tail of the loss distribution and hence the capital required to support that risk. e usual process is:
Choose a small number of representative risk factors as proxies for the many risk sensitivities of the full portfolio. Select a model of how those representative risk factors change. Select a model of how the portfolio P/L depends on the risk factors. Calculate the P/L distribution resulting from the risk factor movements. Select some con dence level of the distribution as a representative UL and thus determine the required capital for the portfolio.
