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FRM Part II · FRM Exam Part II · Central Clearing

A CCP margins a portfolio with a 99% 1-day loss of USD 10 million, a 2-day margin period of risk, and the square-root-of-time rule. It then moves from daily to weekly variation margin exchange, so the margin period of risk becomes 7 days, all else equal. By what percentage does the initial margin requirement increase, to the nearest percent?

Initial margin rises by about 87%. Because margin scales with the square root of the margin period of risk, the ratio is the square root of 7 over 2, about 1.871. The 250% answer wrongly applies linear scaling to the longer period.

  1. A87%Correct
  2. B250%
  3. C40%
  4. D75%

Explanation

Initial margin scales with √MPOR. Old: 10×√2 = 14.14. New: 10×√7 = 26.46. Ratio = √(7/2) = 1.871, an increase of about 87%. The 250% figure wrongly treats the scaling as linear (7/2 = 3.5, so +250%).

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