FRM Part I · FRM Exam Part I · Central Clearing
A CCP sets initial margin for a portfolio as the 99% one-day VaR scaled to a 5-day margin period of risk using the square-root-of-time rule. The one-day 99% VaR is USD 3.0 million. Which initial margin results, to the nearest USD 0.01 million?
Initial margin is about USD 6.71 million. Under square-root-of-time scaling, the one-day VaR of 3.0 million is multiplied by the square root of 5, roughly 2.236. Multiplying by 5 directly would overstate the figure because risk scales with the square root of time.
- AUSD 6.71 millionCorrect
- BUSD 15.00 million
- CUSD 3.00 million
- DUSD 4.50 million
Explanation
Scale by the square root of 5: 3.0 x 2.2361 = 6.708, about 6.71 million. Multiplying by 5 gives 15.00, ignoring square-root scaling. Leaving 3.00 ignores the longer period. 4.50 is an unsupported figure.
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