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FRM Part II · FRM Exam Part II · Validating Bank Holding Companies' Value-at-Risk Models for Market Risk

A bank's 99% one-day VaR model is backtested over 250 trading days and produces 6 exceptions. Under the Basel traffic-light approach, the number expected at the 99% level and the zone for 6 exceptions are, respectively:

At 99% over 250 days, about 2.5 exceptions are expected. Six exceptions lies in the Basel yellow zone, which covers five to nine exceptions, so the model is scrutinized and a higher multiplier applies. Green is zero to four and red is ten or more.

  1. A2.5 exceptions expected; yellow zoneCorrect
  2. B2.5 exceptions expected; green zone
  3. C1 exception expected; red zone
  4. D5 exceptions expected; red zone

Explanation

Expected exceptions = 250 x 1% = 2.5. Basel zones for 250 days: green 0-4, yellow 5-9, red 10 or more. Six exceptions falls in the yellow zone, calling for scrutiny and a higher capital multiplier.

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