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FRM Part II · FRM Exam Part II · Early Warning Indicators

A bank calibrates an EWI threshold using the historical series of its daily net outflow of retail deposits. The series has a mean of 0.40% of deposits and a standard deviation of 0.25%. Management sets the amber trigger at the mean plus 2 standard deviations and the red trigger at the mean plus 3 standard deviations. What are the amber and red thresholds?

The amber threshold is 0.90% and the red threshold is 1.15% of deposits. Amber equals the mean of 0.40% plus two standard deviations of 0.25%, and red equals the mean plus three standard deviations. Each trigger is therefore set at a fixed statistical distance above normal outflows.

  1. A0.65% and 0.90%
  2. B0.90% and 1.15%Correct
  3. C1.40% and 1.90%
  4. D0.80% and 1.20%

Explanation

Amber = 0.40% + 2×0.25% = 0.90%. Red = 0.40% + 3×0.25% = 1.15%. Checking back: (1.15−0.40)/0.25 = 3. The option 0.65%/0.90% uses 1 and 2 standard deviations, and 1.40%/1.90% uses 4 and 6 or omits the mean error.

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