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FRM Part II · FRM Exam Part II · Credit Value at Risk

A bank's CreditRisk+ output shows expected loss of USD 20 million and 99.9% credit VaR of USD 140 million. What is the unexpected loss measure, often used as economic capital, at this confidence level?

Economic capital is the loss at the chosen confidence level minus expected loss. With a 99.9% credit VaR of USD 140 million and expected loss of USD 20 million, unexpected loss is USD 120 million, since expected loss is covered by provisions and pricing rather than capital.

  1. AUSD 120 millionCorrect
  2. BUSD 140 million
  3. CUSD 160 million
  4. DUSD 7 million

Explanation

Economic capital is the quantile loss less expected loss, because expected loss is covered by provisions and pricing: 140 - 20 = 120. Using 140 ignores the expected loss deduction; 160 adds it in the wrong direction; 7 is the ratio 140/20.

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