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

A bank computes a one-year 99.9% loss quantile for its portfolio of USD 1,200 million. The expected loss is USD 150 million. Economic capital is defined as the quantile loss less expected loss, and the quantile loss is USD 690 million. What is the economic capital?

Economic capital is the 99.9% loss quantile of USD 690 million minus the expected loss of USD 150 million, giving USD 540 million. Expected losses are covered by pricing and provisions, so only the unexpected portion requires capital.

  1. AUSD 540 millionCorrect
  2. BUSD 840 million
  3. CUSD 690 million
  4. DUSD 150 million

Explanation

Economic capital = 690 − 150 = 540 million, since expected loss is covered by provisions and pricing. Using 840 would add expected loss instead of subtracting it. Using 690 ignores the expected loss deduction.

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