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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A CCP sets initial margin at 99% one-day VaR on a clearing member's portfolio and assumes a 5-day margin period of risk using square-root-of-time scaling. The portfolio's one-day 99% VaR is USD 4.0 million. Separately, the CCP applies a procyclicality buffer that adds 25% to the margin calculated. The member's variation margin is fully paid daily. What initial margin does the CCP require, to the nearest USD 0.01 million?

Initial margin equals 4.0 million times the square root of 5, which is about 8.94 million, then multiplied by 1.25 for the procyclicality buffer, giving roughly USD 11.18 million. Variation margin is paid daily so it does not enter the initial margin calculation.

  1. AUSD 11.18 millionCorrect
  2. BUSD 8.94 million
  3. CUSD 6.71 million
  4. DUSD 5.00 million

Explanation

Scale by square root of 5: 4.0 x 2.2361 = 8.944 million. Add the 25% buffer: 8.944 x 1.25 = 11.18 million. USD 8.94 million omits the buffer; USD 5.00 million applies the buffer without the time scaling; USD 6.71 million scales by 1.5 instead of the root.

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