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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

A bank's credit portfolio has an expected loss of USD 20 million. The loss distribution is highly right-skewed. The 99% quantile is USD 110 million and the 99.9% quantile is USD 190 million. The bank raises its confidence level from 99% to 99.9%. What is the change in unexpected loss?

Unexpected loss rises by USD 80 million. At 99% it is 110 minus 20, or 90 million; at 99.9% it is 190 minus 20, or 170 million. The expected loss cancels, so the change equals the quantile difference of 80 million.

  1. AUSD 80 million increaseCorrect
  2. BUSD 90 million increase
  3. CUSD 170 million increase
  4. DUSD 60 million increase

Explanation

UL at 99% = 110 - 20 = 90. UL at 99.9% = 190 - 20 = 170. The change is 170 - 90 = 80 million. Expected loss cancels in the difference, so 90 would wrongly treat the 99% UL as the change.

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