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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank's LDA model gives a 99.9% annual aggregate loss quantile (VaR) of USD 180 million for a risk category, with an expected annual loss of USD 40 million. The bank's provisioning already covers expected losses. What is the unexpected-loss capital requirement implied by this model?

Capital for unexpected loss is the 99.9% quantile minus the expected loss already covered by provisions: USD 180 million less USD 40 million equals USD 140 million. Using the full quantile would double count expected losses, while adding them would be wrong in sign.

  1. AUSD 220 million
  2. BUSD 140 millionCorrect
  3. CUSD 40 million
  4. DUSD 180 million

Explanation

Unexpected loss capital = 99.9% VaR minus expected loss = 180 - 40 = USD 140 million, since expected losses are covered by provisions and pricing. USD 180 million ignores that offset, and USD 220 million adds EL instead of subtracting it.

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