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FRM Part II · FRM Exam Part II · Market-Driven Scenarios: An Approach for Plausible Scenario Construction

A bank runs a market-driven scenario with a core shock of -30% in equities. Historical regressions imply a 12% fall in a commodity index per 30% equity fall with residual standard deviation 8%. The portfolio loses USD 2 million per 1% commodity fall. A reviewer argues the point estimate understates risk. Using the implied move plus one residual standard deviation adverse, what is the commodity loss?

The commodity loss is USD 40 million. The implied 12% fall plus one 8% residual standard deviation gives a 20% adverse move, and at USD 2 million per 1% this produces the loss, reflecting uncertainty around the implied relationship.

  1. AUSD 24 million
  2. BUSD 16 million
  3. CUSD 40 millionCorrect
  4. DUSD 64 million

Explanation

Adverse commodity move = 12% + 8% = 20%. Loss = 20 x USD 2 million = USD 40 million. Using only the implied 12% gives USD 24 million; using the 8% residual alone gives USD 16 million.

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