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

A bank monitors the ratio of wholesale funding to total funding. Over the past 24 months the ratio had mean 30% and standard deviation 4%. Management sets an amber trigger at mean plus 1 standard deviation and a red trigger at mean plus 2.5 standard deviations. The current ratio is 38.5%. Which statement is correct?

The amber trigger is 34% (30% + 4%) and the red trigger is 40% (30% + 2.5 × 4%). The current ratio of 38.5% exceeds amber but remains below red, so the indicator is in the amber zone and calls for heightened monitoring, not full escalation.

  1. AThe ratio is above amber (34%) but below red (40%)Correct
  2. BThe ratio is above both amber (34%) and red (38%)
  3. CThe ratio is below amber (34%) and red (40%)
  4. DThe ratio is above amber (35%) but below red (42%)

Explanation

Amber = 30% + 1×4% = 34%. Red = 30% + 2.5×4% = 40%. The current 38.5% exceeds 34% but is under 40%, so amber only. The 38% red level comes from using 2 standard deviations, the wrong multiple.

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