FRM Part II · FRM Exam Part II · Derivatives
A CCP calculates initial margin using a 99% one-day VaR of 4.0 million for a member's portfolio, and the margin period of risk is 5 days. Assuming returns are i.i.d. normal and using the square-root-of-time rule, what initial margin is required, approximately?
The initial margin is about 8.94 million. Under the square-root-of-time rule, the one-day 99% VaR of 4.0 million is multiplied by the square root of five, roughly 2.236. Scaling by five instead would wrongly give 20 million.
- A4.0 million
- B8.94 millionCorrect
- C20.0 million
- D10.0 million
Explanation
Scale by the square root of 5: 4.0 × 2.236 = 8.94 million. Using 5 directly gives 20.0 million, which is the error of scaling linearly. Using 4.0 alone ignores the horizon, and 10.0 has no basis.
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