Skip to content

FRM Part II · FRM Exam Part II · Central Clearing

A CCP sets initial margin for a clearing member's portfolio using a 99% one-day VaR of USD 4.0 million, assuming daily P&L is normal with zero mean and that volatility scales with the square root of time. The CCP's margin period of risk is 5 days. What is the approximate initial margin requirement under the square-root-of-time scaling?

Initial margin is about USD 8.9 million. Under square-root-of-time scaling, the one-day 99% VaR of USD 4.0 million is multiplied by the square root of the five-day margin period of risk, 2.236. Linear scaling to USD 20 million would overstate the requirement.

  1. AUSD 20.0 million
  2. BUSD 8.9 millionCorrect
  3. CUSD 4.0 million
  4. DUSD 1.8 million

Explanation

Scale the one-day VaR by the square root of the margin period of risk: 4.0 x sqrt(5) = 4.0 x 2.236 = 8.94, or about USD 8.9 million. Multiplying by 5 (USD 20.0 million) wrongly scales linearly. Dividing by sqrt(5) gives 1.79, which scales the wrong direction.

Did you get it right without looking?

One question tells you little. A timed set on Central Clearing shows your real accuracy, how long you take and where you lose marks.

Practise Central ClearingFree diagnostic mock

More Central Clearing questions