Mathematical Modeling of Concentration Risk under the Default Risk Charge Using Probability and Statistics Theory

In the Fundamental Review of Trading Book (FRTB), latest regulation for minimum capital market risk requirements, one major changes, is replacing Incremental Risk Charge (IRC) with Default (DRC). The DRC measures only default and does not consider migration rating risk. second new change in this approach was that now includes equity assets, contrary to IRC. This paper studies modeling under Internal Model Approach (IMA) regulator conditions every component must respect. FRTB presents measurement as Value at (VaR) over a one-year horizon, quantile equal 99.9%. We use multifactor adjustment measure compare it Monte Carlo understand how fits. then define concentration propose two methods quantify risk: Ad Hoc Add-On methods. Finally, we study behavior respect