CMA Final · Risk Management in Banking and Insurance · Market Risk Management
A bank's 1-day 99% VaR is backtested over 250 trading days. Under the Basel traffic-light approach, how many exceptions fall in the green zone?
The green zone covers 0 to 4 exceptions out of 250 days. Five to nine exceptions put the model in the yellow zone, attracting a higher multiplier, and ten or more is the red zone, where the model is presumed inaccurate.
- A0 to 4 exceptionsCorrect
- B5 to 9 exceptions
- C10 or more exceptions
- DExactly 0 exceptions only
Explanation
Under the Basel backtesting traffic-light approach for 250 observations, 0 to 4 exceptions is the green zone, 5 to 9 the yellow zone and 10 or more the red zone. Hence 5 to 9 is yellow and 10 or more is red.
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