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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank allocates capital to a trading desk using its marginal contribution to firm-wide economic capital rather than its stand-alone capital. Firm-wide economic capital is USD 500 million with the desk and USD 440 million without it. The desk's stand-alone capital is USD 90 million. Which statement is correct?

The desk's marginal capital is USD 60 million, the difference between firm capital with and without it. This is below its USD 90 million stand-alone capital because of diversification benefits. Marginal contributions generally do not add up to total firm capital.

  1. AThe desk's marginal capital is USD 60 million, below its stand-alone figure, reflecting diversificationCorrect
  2. BThe desk's marginal capital is USD 90 million because marginal and stand-alone capital are equal
  3. CThe desk's marginal capital is USD 440 million
  4. DThe desk's marginal capital is USD 60 million, and the marginal contributions of all desks must sum to firm-wide capital

Explanation

Marginal capital is 500 - 440 = 60 million, which is below the 90 million stand-alone figure because the desk diversifies the rest of the firm. The final option is wrong: marginal contributions generally do not sum to total capital, so they are not a full allocation without scaling.

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