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VaR, Capital Attribution and Profitability

  • Use the attached excel sheet to calculate data and answer the following questions.
  1. Line of Business VaR vs. Total VaR
    a. Using a lookback period of 2003-2018 (i.e., using all 16 years of data), what is the one-year 99% confidence
    level VaR for each transaction type?
    b. What is the one-year 99% confidence level VaR for the Principal Transactions business segment as a
    whole?
    c. How does the VaR of the total business segment compare to the sum of the VaRs of the individual
    transaction types? Explain in words what causes this difference.
  2. Varying Lookback Periods
    a. Using a lookback period of just the most recent five years (i.e., 2014-2018), what is the one-year 99%
    confidence level VaR for each transaction type? What is the one-year 99% confidence level VaR for the
    Principal Transactions business segment as a whole?
    b. Compare the VaR of the 2014-2018 lookback period, to the VaR of the 2003-2018 lookback period, both by
    transaction type, as well as a whole. Briefly discuss the implications of your comparison.
  3. Regulatory Capital Requirement
    Assume that regulators require Citigroup to keep a multiple of 3 times VaR for capital adequacy.
    a. For the one-year 99% confidence level VaR, how much capital would be needed for the overall Principal
    Transactions business segment, if using a lookback period of 2003-2018?
    b. How much capital would be needed for the overall Principal Transactions business segment, if using a
    lookback period of 2010-2018?
    c. Using the lookback period of 2003-2018, allocate the required capital of the overall Principal Transactions
    business segment to the individual transaction types, based on their relative contribution to VaR.
  4. Risk-Adjusted Profitability
    Citigroup management wants to review the risk-adjusted returns of the Principal Transactions business
    segment. Using the required capital calculated in Question 3, for the lookback period 2003-2018:
    a. What was the Return on Required Capital (“ROC”) for 2018 for the overall Principal Transactions business
    segment as a whole? (ROC is equal to the reported revenue divided by required capital.)
    b. What was the ROC in 2018 for each transaction type?
    c. What was the ROC for the average revenues in the post-Credit Crisis years (2010-2018), for each
    transaction type? What recommendations might you make to management to improve risk-adjusted
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