FRM Part II · FRM Exam Part II · Future Value and Exposure
A bank sets limits on a client using PFE at 95% confidence. The exposure at a future date is normally distributed with mean 6 and standard deviation 10 (USD million, before flooring at zero). Using z = 1.645, what is the 95% PFE?
The 95% PFE is 22.45 million USD. It equals the mean of 6 plus 1.645 times the standard deviation of 10, which is 16.45. Forgetting to add the mean would give 16.45, which understates the exposure quantile.
- A16.45
- B22.45Correct
- C6.00
- D10.00
Explanation
PFE = mean + 1.645 × sd = 6 + 16.45 = 22.45. Using 16.45 omits the mean.
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