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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A bank's market risk team calibrates a geopolitical stress scenario for a EUR 500 million equity book with beta 1.2 to a broad index. In the scenario, the index falls 8% in a month. The bank also holds an index put hedge with notional EUR 150 million that pays off linearly (delta of 1 for this move, ignoring premium and gamma). What is the net scenario loss on the book after the hedge?

The net scenario loss is EUR 36.0 million. The book falls by beta 1.2 times 8% on EUR 500 million, which is EUR 48.0 million, and the index put hedge gains 8% on EUR 150 million, which is EUR 12.0 million, leaving 48 minus 12.

  1. AEUR 48.0 millionCorrect
  2. BEUR 36.0 million
  3. CEUR 40.0 million
  4. DEUR 12.0 million

Explanation

Book loss = 1.2 x 8% x 500 = EUR 48.0 million. Hedge gain = 8% x 150 = EUR 12.0 million. Net loss = 48 - 12 = EUR 36.0 million. Option EUR 48.0 million ignores the hedge, EUR 40.0 million omits beta (8% x 500) without hedge, and EUR 12.0 million is the hedge payoff only. Correct is EUR 36.0 million.

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