Internal models approach (market risk)
Okay, so imagine you have a toy box with a bunch of different toys inside. Now, you want to know how much all those toys are worth if you were to sell them.
An internal models approach is like if you were to take each toy out of the box and look at it closely to figure out how much it's worth. You might look at what it's made of, how old it is, and how popular it is with other kids.
For market risk, banks and other financial institutions use an internal models approach to figure out how much their investments are worth. They take a really close look at each investment to figure out how risky it is and how much it could gain or lose in value. This helps them make decisions about how much money to put into each investment and how to manage their risks.
Basically, an internal models approach is like taking a really close look at something to figure out exactly how much it's worth or how risky it is.
An internal models approach is like if you were to take each toy out of the box and look at it closely to figure out how much it's worth. You might look at what it's made of, how old it is, and how popular it is with other kids.
For market risk, banks and other financial institutions use an internal models approach to figure out how much their investments are worth. They take a really close look at each investment to figure out how risky it is and how much it could gain or lose in value. This helps them make decisions about how much money to put into each investment and how to manage their risks.
Basically, an internal models approach is like taking a really close look at something to figure out exactly how much it's worth or how risky it is.