Skip to content

FRM Part II · FRM Exam Part II · Capital Regulation Before the Global Financial Crisis

A bank's trading desk reports a 1-day 99% VaR of $2.0 million. Its 10-day 99% VaR is estimated by the square-root-of-time rule. The 60-day average of 10-day VaR is equal to the current figure, and the supervisor applies a multiplier of 3 under the 1996 Amendment (ignore specific risk). What is the general market risk capital charge, to the nearest $0.01 million?

The capital charge is $18.97 million. Scale the 1-day VaR of $2.0 million to ten days with the square root of ten, giving $6.32 million, then apply the regulatory multiplier of 3. Using the 1-day figure or linear scaling gives wrong answers.

  1. A$6.00 million
  2. B$18.97 millionCorrect
  3. C$12.65 million
  4. D$60.00 million

Explanation

10-day VaR = 2.0 × √10 = 6.3246 million. Multiply by 3 gives 18.97 million. Using 1-day VaR with the multiplier gives 6.00 (missed horizon scaling); 2×√10×2 would be 12.65 (wrong multiplier); 60 uses 10 days linearly times 3.

Did you get it right without looking?

One question tells you little. A timed set on Capital Regulation Before the Global Financial Crisis shows your real accuracy, how long you take and where you lose marks.

Practise Capital Regulation Before the Global Financial CrisisFree diagnostic mock

More Capital Regulation Before the Global Financial Crisis questions