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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank has a USD 800 million portfolio. The policy limits any single issuer to 5% of portfolio value and total exposure to a sector to 20%. The portfolio holds USD 45 million in Issuer A and USD 150 million in Sector X, including Issuer A. After a mark-to-market decline, the portfolio value falls to USD 700 million with the exposures unchanged in dollar terms except Issuer A falls to USD 40 million and Sector X to USD 135 million. Which statement is correct after the decline?

Only the issuer limit is breached. Issuer A is USD 40 million of USD 700 million, or 5.71%, above the 5% cap, while Sector X is USD 135 million, or 19.29%, within the 20% cap.

  1. ABoth limits are breachedCorrect
  2. BOnly the issuer limit is breached
  3. COnly the sector limit is breached
  4. DNeither limit is breached

Explanation

Issuer A: 40/700 = 5.71% > 5%, breach. Sector X: 135/700 = 19.29% < 20%, no breach. So only the issuer limit is breached. Before the decline, 45/800 = 5.63% was already above 5%, but the sector was 18.75%.

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