FRM Part II · FRM Exam Part II · Backtesting VaR
A bank's 10-day 99% VaR is $20 million, and its supervisor sets the multiplier at 3.5 because of yellow-zone backtesting results. Ignoring other capital components, what is the market risk capital charge based on this VaR?
The capital charge is the multiplier times VaR, so 3.5 times $20 million equals $70 million. Using the base multiplier of 3 would understate capital at $60 million because it ignores the yellow-zone add-on.
- A$60 million
- B$70 millionCorrect
- C$57.1 million
- D$20 million
Explanation
Capital charge equals the multiplier times VaR: 3.5 × $20 million = $70 million. Using 3 gives $60 million, which ignores the add-on. Dividing by 3.5 gives $5.7 million scale error, and $57.1 million is 20/0.35, an inversion error.
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