The RAROC capital charge = F
1(VAR) + F
2(VAR limit – VAR) + F
3 (VAR – VAR limit)
Where:
F1 = constant that adjusts for day to day event risk not captured in the VAR model
F2 = the multiplier used to determine the unused portion of the VAR limit
F3 = the multiplier used to determine the charge for exceeding the VAR limit
The question asks for the daily RAROC charge, so we need to first convert the 10-day VAR limit to a daily limit. $2,530,000 / √10 = $800,000
Thus the RAROC capital charge is:
2.25($950,000) + 0 + 3.20($950,000 - $800,000) = $2,617,500.
