capital allocation determined as follows:   CA = max{ [ ( $50,000,000 - $50,000,000 ) ´ 0.20 ´ 0.08 ], 0 } = $0   The detailed risk weights for market instruments are given in Exhibit 14.1. Under the original Basel rules, assets are defined as belonging to a banks banking book or its trading book. The banking book essentially comprises the traditional activities of deposit taking and lending, with assets booked at cost and not revalued. Trading book assets (which include derivatives) are marked-to-market on a daily basis, with a daily unrealized profit or loss recorded. Such assets are risk-weighted on a dif- ferent basis to that shown in Exhibit 14.1, on a scale made up of market risk and credit risk. Market risk is estimated using techniques such as   4FRAs and swaps are discussed in Chapter 11.     value-at-risk, while credit risk is a function of the type of asset. The calcu- lation of capital requirements for trading book assets is more complex than that for banking book assets. The process of determining the capital requirement of a banking insti- tution involves calculating the quantitative risk exposure of its existing operations and comparing this amount to the level of regulatory capital of the bank. The different asset classes are assigned into the risk buckets of 0%, 20%, 50%, and 100%. Not surprisingly, this somewhat rigid clas- sification has led to distortions in the pricing of assets, as any movement between the risk buckets has a significant impact on the capital required and the return on capital calculation. Over time the impact of the Basel rules has led to the modified rules now proposed as Basel II, the final form ofwhichis expected to come into force in 2005.   EXHIBIT 14.1 Risk Weightings of Typical Banking Book Assets, Basel I   Weighting Asset Type Remarks   0% Cash Claims on own sovereign and Zone A sovereigns and central banks Claims on Zone B sovereign issuers denominated in that countrys domestic currency