FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement
A bank's IM model for a netting set uses a 99% one-sided confidence level over a 10-day margin period of risk. The 1-day 99% loss estimate for the portfolio is USD 2.0 million, with returns assumed i.i.d. normal. What is the approximate IM requirement using square-root-of-time scaling?
The IM is about USD 6.32 million, found by scaling the 1-day 99% loss of USD 2.0 million by the square root of 10, roughly 3.162. Multiplying by 10 would wrongly assume losses grow linearly with time under i.i.d. returns.
- AUSD 6.32 millionCorrect
- BUSD 20.0 million
- CUSD 2.0 million
- DUSD 3.16 million
Explanation
Scale by the square root of 10: 2.0 × 3.162 = 6.32 million. Using 10 directly (20.0) ignores square-root scaling; 3.16 is just the scaling factor; 2.0 ignores the horizon.
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